UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

~~[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED~~ ~~September 30, 2017~~

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended March 28, 2020

~~[ ]~~

[ ]

TRANSITION REPORT PURSUANT ~~TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM~~ TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ________________ to _______________

Commission File ~~Number:~~ Number 001-35383

THE EASTERN COMPANY

(Exact name of registrant as specified in its charter)

Connecticut	06-0330020
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

112 Bridge Street, Naugatuck, Connecticut	06770
(Address of principal executive offices)	(Zip Code)

(203)-729-2255

Registrant’s telephone number

~~(203) 729-2255~~

~~(Registrant's telephone number, including area code)~~

Securities registered pursuant to Section 12(b) of the Act:

~~Not applicable~~

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, No Par Value	EML	NASDAQ Global Market

~~(Former name, former address and former fiscal year, if changed since last report)~~

Indicate by check mark whether the ~~registrant:~~registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ~~[X]~~[X] No [ ]

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files).

Yes ~~[X]~~[X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See ~~the~~ definitions of ~~"large~~“large accelerated filer,~~" "accelerated~~” “accelerated filer,~~" "smaller~~” “smaller reporting company,"” and ~~"emerging~~“emerging growth ~~company"~~company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ]	Accelerated filer [X]
Non-accelerated filer [ ] ~~(Do not check if a smaller reporting company)~~	Smaller reporting company [[ X]
	Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the ~~Exchange~~ Act). Yes [ ] No ~~[X]~~[X]

~~Indicate the number~~As of March 28, 2020, 6,230,731 shares ~~outstanding of each~~ of the ~~issuer's classes of~~registrant’s common stock, ~~as of the latest practicable date.~~no par value per share, were issued and outstanding.

~~Class~~	~~Outstanding as of October 18, 2017~~
~~Common Stock, No par value~~	~~6,261,415~~

The Eastern Company

Form 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 28, 2020

TABLE OF CONTENTS

~~Item No.~~		Page
	~~PART I. FINANCIAL INFORMATION~~
~~Item 1.~~	~~Financial Statements~~
	~~Condensed Consolidated Balance Sheets (Unaudited) at September 30, 2017 and December 31, 2016~~	3
	~~Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2017 and October 1, 2016~~	5
	~~Condensed Consolidated~~
PART I
Item 1.	Financial Statements ~~of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2017 and October 1, 2016~~	6 3.
	~~Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2017 and October 1, 2016~~	7
	~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~	8
Item 2.	~~Management's~~ Management’s Discussion and Analysis of Financial Condition and Results of Operations	18 17.

Item 3.	Quantitative and Qualitative Disclosures ~~about~~About Market Risk	27
~~Item 4.~~	~~Controls and Procedures~~	27 25.
	~~PART II. OTHER INFORMATION~~
Item 1.4.	~~Legal Proceedings~~ Controls and Procedures	28 25.
~~Item 1A.~~	~~Risk Factors~~	28
PART II
Item 1.	Legal Proceedings	26.

Item 1A.	Risk Factors	26.

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28 28.

Item 3.	Defaults Upon Senior Securities	29 28.
Item 4.	Mine Safety Disclosures	29 28.
~~Item 5.~~	~~Other Information~~	29
Item 6.5.	~~Exhibits~~ Other Information	29 28.
~~SIGNATURES~~	30
Item 6.	Exhibits	28.

	Signatures	29.

PART I1 – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED ~~BALANCE SHEETS~~STATEMENTS OF OPERATIONS (UNAUDITED)

ASSETS September 30, 2017 December 31, 2016
Current Assets
Cash and cash equivalents $ 21,194,091 $ 22,725,376
Marketable securities 366,554 --
Accounts receivable, less allowances: $507,000 - 2017; $430,000 - 2016 28,448,534 18,135,792
Inventories 45,207,813 34,030,286
Prepaid expenses and other assets 4,398,041 1,858,471
Total Current Assets 99,615,033 76,749,925

Property, Plant and Equipment 70,500,848 64,911,071
Accumulated depreciation (41,629,685 ) (38,745,557 )
28,871,163 26,165,514

Goodwill 32,395,740 14,819,835
Trademarks 3,680,037 166,312
Patents, technology, and other intangibles net of accumulated amortization 9,621,147 1,764,449
Deferred income taxes 1,180,355 4,532,361
46,877,279 21,282,957
TOTAL ASSETS $ 175,363,475 $ 124,198,396

	Three Months Ended
	March 28, 2020			March 30, 2019
Net sales	$	65,325,616		$	60,883,148
Cost of products sold		(50,663,943	)		(47,074,105	)
Gross margin		14,661,673			13,809,043

Product development expense		(775,444	)		(2,239,776	)
Selling and administrative expense		(10,024,958	)		(8,398,265	)
Restructuring costs		—			(836,694	)
Operating profit		3,861,271			2,334,308

Interest expense		(827,664	)		(292,540	)
Other income		744,793			13,925
Income before income taxes		3,778,400			2,055,693

Income taxes		882,583			484,733
Net income	$	2,895,817		$	1,570,960

Earnings per share:
Basic	$	.46		$	.25

Diluted	$	.46		$	.25

Cash dividends per share:	$	.11		$	.11

See accompanying notes.

THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

LIABILITIES AND SHAREHOLDERS' EQUITY September 30, 2017 December 31, 2016
Current Liabilities
Accounts payable $ 15,327,476 $ 7,048,174
Accrued compensation 3,273,317 3,112,404
Other accrued expenses 6,360,362 1,812,647
Current portion of long-term debt 6,550,000 892,857
Total Current Liabilities 31,511,155 12,866,082

Other long-term liabilities 288,805 288,805
Long-term debt, less current portion 29,062,500 892,857
Accrued postretirement benefits 1,018,815 1,051,700
Accrued pension cost 25,780,522 26,631,438

Shareholders' Equity
Voting Preferred Stock, no par value:
        Authorized and unissued: 1,000,000 shares
Nonvoting Preferred Stock, no par value:
        Authorized and unissued: 1,000,000 shares
Common Stock, no par value:
       Authorized: 50,000,000 shares
Issued: 8,956,144 shares in 2017 and 8,950,827 shares in 2016
Outstanding: 6,261,415 shares in 2017 and 6,256,098 shares in 2016 29,277,169 29,146,622
Treasury Stock: 2,694,729 shares in 2017 and 2016 (19,105,723 ) (19,105,723 )
Retained earnings 98,779,632 95,631,216

Accumulated other comprehensive income (loss):
Foreign currency translation (902,749 ) (2,165,081 )
Unrealized loss on marketable securities and
derivative, net of tax (9,479 ) --
Unrecognized net pension and postretirement benefit costs, net of tax (20,419,472 ) (21,039,520 )
   Accumulated other comprehensive loss (21,331,700 ) (23,204,601 )
Total Shareholders' Equity 87,619,378 82,467,514
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 175,363,475 $ 124,198,396

	Three Months Ended
	March 28, 2020			March 30, 2019
Net income	$	2,895,817		$	1,570,960
Other comprehensive income (loss):
Change in foreign currency translation		(1,304,447	)		412,624
Change in pension and postretirement benefit costs, net of tax expense of: 2020 – $81,143 and 2019 - $70,938		260,295			222,681
Change in fair value of marketable securities, net of tax benefit of: 2020 - $2,897 and 2019 - $3,471		8,878			(10,639	)
Change in fair value of interest rate swap and marketable securities, net of tax benefit of: 2020 – $535,029 and 2019 – $24,619		(1,697,793	)		(77,961	)
Total other comprehensive income (loss)		(2,733,067	)		546,705
Comprehensive income	$	162,750		$	2,117,665

See accompanying notes.

THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED ~~STATEMENTS OF OPERATIONS (UNAUDITED)~~BALANCE SHEETS

Nine Months Ended Three Months Ended
September 30, 2017 October 1, 2016 September30, 2017 October 1, 2016
Net sales $ 150,095,975 $ 103,463,316 $ 56,007,937 $ 33,478,347
Cost of products sold (113,888,301 ) (77,980,077 ) (44,058,406 ) (24,105,604 )
Gross margin 36,207,674 25,483,239 11,949,531 9,372,743

Engineering expenses (4,162,151 ) (1,991,260 ) (1,848,861 ) (663,705 )
Selling and administrative expenses (23,749,219 ) (16,161,133 ) (6,527,029 ) (5,444,924 )
Operating profit 8,296,304 7,330,846 3,573,641 3,264,114

Interest expense (659,884 ) (97,486 ) (327,206 ) (28,817 )
Other income 69,278 54,687 13,513 28,169
Income before income taxes 7,705,698 7,288,047 3,259,948 3,263,466

Income taxes 2,491,674 2,152,073 1,029,467 863,402
Net income $ 5,214,024 $ 5,135,974 $ 2,230,481 $ 2,400,064

Earnings per Share:
Basic $ .83 $ .82 $ .36 $ .38

Diluted $ .83 $ .82 $ .35 $ .38

Cash dividends per share: $ .33 $ .33 $ .11 $ .11

ASSETS	March 28, 2020			December 28, 2019
	(unaudited)
Current Assets
Cash and cash equivalents	$	16,508,881		$	17,996,505
Marketable securities		23,154			34,305
Accounts receivable, less allowances: 2020 - $699,000;2019 - $556,000		39,873,177			37,941,900
Inventories		55,274,876			54,599,266
Prepaid expenses and other assets		3,955,872			4,343,507
Total Current Assets		115,635,960			114,915,483

Property, Plant and Equipment		88,409,321			88,336,243
Accumulated depreciation		(46,482,754	)		(46,313,630	)
		41,926,567			42,022,613

Goodwill		79,418,533			79,518,012
Trademarks		5,404,283			5,404,283
Patents and other intangibles net of accumulated amortization		25,699,680			26,460,110
Right of Use Assets		11,852,653			12,342,475
		122,375,149			123,724,880
TOTAL ASSETS	$	279,937,676		$	280,662,976

See accompanying notes.

THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED ~~STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)~~BALANCE SHEETS

Nine Months Ended Three Months Ended
September 30, 2017 October 1, 2016 September 30, 2017 October 1, 2016
Net income $ 5,214,024 $ 5,135,974 $ 2,230,481 $ 2,400,064
Other comprehensive income/(loss):
Change in foreign currency translation 1,262,332 (311,697 ) 378,509 (231,831 )
Change in fair value marketable securities, net of tax
benefit of:
        2017 – $22,688 and $17,135, respectively
        2016 - $-
41,548 — 31,379 —
Change in fair value of derivative financial instrument, net of tax benefit of:
        2017 - $31,275 and $(10,406)
        2016 - $-
(51,027 ) — 16,978 —
Change in pension and postretirement benefit costs, net of taxes of:
2017 – $338,592 and $112,865 respectively
2016 – $559,542 and $(105,703), respectively
620,048 (696,200 ) 206,682 192,456
Total other comprehensive income 1,872,901 (1,007,897 ) 633,548 (39,375 )
Comprehensive income $ 7,086,925 $ 4,128,077 $ 2,864,029 $ 2,630,689

LIABILITIES AND SHAREHOLDERS’ EQUITY	March 28, 2020			December 28, 2019
	(unaudited)
Current Liabilities
Accounts payable	$	22,629,076		$	19,960,507
Accrued compensation		2,216,765			3,815,186
Other accrued expenses		3,797,178			2,967,961
Current portion of long-term debt		5,187,689			5,187,689
Total Current Liabilities		33,830,708			31,931,343

Deferred income taxes		5,270,465			5,270,465
Other long-term liabilities		2,465,260			2,465,261
Lease liability		11,852,653			12,342,475
Long-term debt, less current portion		92,356,121			93,577,544
Accrued postretirement benefits		1,001,509			1,007,146
Accrued pension cost		28,052,482			28,631,485

Shareholders’ Equity

Voting Preferred Stock, no par value:
Authorized and unissued: 1,000,000 shares
Nonvoting Preferred Stock, no par value:
Authorized and unissued: 1,000,000 shares
Common Stock, no par value, Authorized: 50,000,000 shares		30,890,108			30,651,815
Issued: 8,980,460 shares in 2020 and 8,975,434 shares in 2019
Outstanding: 6,230,731 shares in 2020 and 6,240,705 shares in 2019
Treasury Stock: 2,749,729 shares in 2020 and 2,734,729 shares in 2019		(20,537,962	)		(20,169,098	)
Retained earnings		122,723,970			120,189,111
Accumulated other comprehensive income (loss):
Foreign currency translation		(3,342,399	)		(2,037,952	)
Unrealized gain on marketable securities, net of tax		8,878			—
Unrealized gain (loss) on interest rate swap, net of tax		(1,530,775	)		167,018
Unrecognized net pension and postretirement benefit costs, net of tax		(23,103,342	)		(23,363,637	)
Accumulated other comprehensive loss		(27,967,638	)		(25,234,571	)
Total Shareholders’ Equity		105,108,478			105,437,257
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	279,937,676		$	280,662,976

See accompanying ~~notes~~notes.

THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Nine Months Ended						Three Months Ended
	September 30, 2017			October 1, 2016			March 28, 2020			March 30, 2019
Operating Activities
Net income	$	5,214,024		$	5,135,974		$	2,895,817		$	1,570,960
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,230,174			2,795,699			2,055,782			1,438,799
Unrecognized pension and postretirement benefits		74,839			952,205			(678,305	)		207,816
Loss on sale of equipment and other assets		18,585			45,313
(Gain)/loss on sale of equipment and other assets								(437,446	)		671,138
Provision for doubtful accounts		52,663			—			156,286			25,711
Issuance of Common Stock for directors' fees		130,547			112,086
Stock compensation expense								238,293			104,992
Changes in operating assets and liabilities:
Accounts receivable		(3,894,569	)		(1,626,625	)		(2,273,864	)		(2,123,227	)
Inventories		2,267,945			2,665,002			(994,546	)		1,313,875
Prepaid expenses and other		(2,686,763	)		78,914			341,582			(81,231	)
Other assets		494,750			(67,324	)		(415,415	)		101,919
Accounts payable		1,466,401			(366,454	)		2,766,829			(27,186	)
Accrued compensation		(172,509	)		(215,313	)		(1,585,976	)		(1,724,968	)
Other accrued expenses		3,978,256			(526,930	)		(564,572	)		11,718
Net cash provided by operating activities		10,174,343			8,982,547			1,504,465			1,490,316

Investing Activities
Marketable securities		(366,554	)		—			11,151			(91,400	)
Business Acquisition, net of cash acquired		(42,148,000	)		—
Capitalized software								—			(104,484	)
Proceeds from sale of equipment								445,212			—
Purchases of property, plant and equipment		(1,457,641	)		(1,819,894	)		(828,115	)		(743,622	)
Net cash used in investing activities		(43,972,195	)		(1,819,894	)		(371,752	)		(939,506	)

Financing Activities
Proceeds from issuance of long-term debt		31,000,000			—
Proceeds from short term borrowings		6,614,611			—
Payments on revolving credit note		(1,614,611	)		—
Principal payments on long-term debt		(2,173,214	)		(1,071,428	)		(1,221,423	)		(387,500	)
Purchase common stock for treasury								(368,864	)		—
Dividends paid		(2,065,607	)		(2,063,085	)		(686,614	)		(686,740	)
Net cash provided by (used in) financing activities		31,761,179			(3,134,513	)
Net cash used in financing activities								(2,276,901	)		(1,074,240	)

Effect of exchange rate changes on cash		505,388			(203,066	)		(343,436	)		144,954
Net change in cash and cash equivalents		(1,531,285	)		3,825,074			(1,487,624	)		(378,476	)

Cash and cash equivalents at beginning of period		22,725,376			17,814,986			17,996,505			13,925,765
Cash and cash equivalents at end of period	$	21,194,091		$	21,640,060		$	16,508,881		$	13,547,289


Non-cash investing and financing activities								(489,822	)
Right of use asset								489,822
Lease liability

See accompanying notes.

THE EASTERN COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~September 30, 2017~~March 28, 2020

Note A – Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Regulation S-X 10-01 and do not include all of the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete financial statements. Refer to the consolidated financial statements of The Eastern Company ~~(the "Company"~~(together with its consolidated subsidiaries, the “Company,” “we,” “us” or our”) and the notes thereto included in the ~~Company's~~Company’s Annual Report on Form 10-K for the ~~fiscal~~ year ended December ~~31, 2016~~28, 2019, filed with the Securities and Exchange Commission on March 5, 2020 (the “2019 Form 10-K”), for additional information.

The accompanying condensed consolidated financial statements are unaudited. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for interim periods have been reflected therein. All intercompany accounts and transactions are eliminated. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

On April 3, 2017, the Company completed its acquisition of Velvac Holdings, Inc., a Delaware corporation including its subsidiaries ("Velvac"), pursuant to a Securities Purchase Agreement (the "Securities Purchase Agreement"), dated April 3, 2017, by and among Jeffery R. Porter, W. Greg Bland, John Backovitch, Dave Otto, Bob Otto, Timothy Rintelman, Robert Brester, Dan McGrew, Mark Moeller and Prospect Partners II, L.P. (collectively, the "Sellers"). Pursuant to the Securities Purchase Agreement, the Company acquired 100% of the issued and outstanding stock of Velvac from the Sellers (the "Acquisition") for $39.5 million and earnout consideration contingent upon Velvac achieving minimum earnings performance levels with the amount of any such earnout consideration based on a specific percentage (either 7.5% or 15%) of sales of Velvac's new proprietary Road-iQ product line measured over annual calculation periods through April 2022, as set forth in the Securities Purchase Agreement (the "Earnout Consideration"), subject to certain customary post-closing adjustments. The Acquisition was financed with a $31 million term loan from People's United Bank, National Association ("People's"), a $5 million draw down on the Company's $10 million revolving credit facility with People's and $3.5 million in cash. Please refer to the Form 8-K filed on April 7, 2017 and the amendment thereto files on June 19, 2017 for further details.

The condensed consolidated balance sheet as of December ~~31, 2016~~28, 2019 has been derived from the audited consolidated balance sheet ~~as of~~at that date.

~~Commencing with this Quarterly Report~~The Company’s fiscal year is a 52-53-week fiscal year ending on ~~Form 10-Q, engineering expenses have been separately identified for all periods presented. These expenses have been reclassified~~the Saturday nearest to December 31. References to fiscal 2019 or the 2019 fiscal year mean the 52-week period ended on December 28, 2019 and references to fiscal 2020 or the 2020 fiscal year mean the 53-week period ending on January 2, 2021. In a 52-week fiscal year, each quarter is 13 weeks long. In a 53 week fiscal year, each of the first three fiscal quarters is a 13 weeks long, and the fourth fiscal quarter is 14 weeks long. References to the first quarter of fiscal 2019, the first quarter of 2020 or the three months ended March 30, 2019 mean the period from ~~cost~~December 30, 2018 to March 30, 2019. References to the first quarter of ~~products sold~~fiscal 2020, the first fiscal quarter of 2020 or the three months ended March 28, 2020 mean the 13-week period from December 29, 2019 to ~~selling and administrative expenses. Engineering expense is not necessarily a cost of product sold. Rather, these expenses are related to product development.~~

March 28, 2020.

Note B – Earnings Per Share

The denominators used ~~in the~~to calculate earnings per share ~~computations~~ are as ~~follows:~~follow:

	Nine Months Ended				Three Months Ended				Three Months Ended
	September 30, 2017		October 1, 2016		September 30, 2017		October 1, 2016		March 28, 2020		March 30, 2019
Basic:
Weighted average shares outstanding		6,258,278		6,250,185		6,259,872		6,254,287		6,237,921		6,231,713

Diluted:
Weighted average shares outstanding		6,258,278		6,250,185		6,259,872		6,254,287		6,237,921		6,231,713
Dilutive stock options		36,679		--		36,679		--
Dilutive stock appreciation rights										3,131		33,116
Denominator for diluted earnings per share		6,294,957		6,250,185		6,296,551		6,254,287		6,241,052		6,264,829

Note C – Inventories ~~Net~~

~~The components~~Inventories consist of ~~inventories are as follows:~~the following components:

	September 30, 2017		December 31, 2016		March 28, 2020		December 28, 2019

Raw material and component parts	$	11,729,271	$	8,829,236	$	17,438,617	$	17,225,469
Work in process		9,456,164		7,118,149		11,145,881		11,009,648
Finished goods		24,022,378		18,082,901		26,690,378		26,364,149
	$	45,207,813	$	34,030,286
Total inventories					$	55,274,876	$	54,599,266

Note D – ~~Segment Information~~Leases

~~Segment financial information is~~The Company presents right-of-use (ROU) assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months, in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases. The Company elected the transition method thereby not restating comparable periods. The Company elected to account for non-lease components as ~~follows:~~part of the lease component to which they relate. Lease accounting involves significant judgements, including making estimates related to the lease term, lease payments, and discount rate.

The Company has operating leases for buildings, warehouse and office equipment. The Company determines whether an arrangement is, or contains, a lease at contract inception. An arrangement contains a lease if the Company has the right to direct the use of and obtain substantially all of the economic benefits of an identified asset. ROU assets and lease liabilities are recognized at lease commencement based on the present value of lease payments over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Most leases include one or more options to renew. The exercise of lease renewal options is at our sole discretion. The Company’s option to extend certain leases ranges from 12 – 120 months. All options to extend, when it is reasonably certain the option will be exercised, have been included in the calculation of the ROU asset and lease liability.

Nine Months Ended Three Months Ended
September 30, 2017 October 1, 2016 September 30, 2017 October 1, 2016
Revenues:
Sales to unaffiliated customers:
Industrial Hardware $ 83,500,656 $ 45,689,104 $ 32,959,599 $ 15,210,943
Security Products 46,232,410 43,722,828 16,115,356 13,648,701
Metal Products 20,362,909 14,051,384 6,932,982 4,618,703
$ 150,095,975 $ 103,463,316 $ 56,007,937 $ 33,478,347

Income before income taxes:
     Industrial Hardware $ 2,877,052 $ 3,769,045 $ 1,813,133 $ 1,574,573
     Security Products 4,290,745 4,533,995 1,604,950 1,613,148
     Metal Products 1,128,507 (972,194 ) 155,558 76,393
Operating Profit 8,296,304 7,330,846 3,573,641 3,264,114
     Interest expense (659,884 ) (97,486 ) (327,206 ) (28,817 )
     Other income 69,278 54,687 13,513 28,169
$ 7,705,698 $ 7,288,047 $ 3,259,948 $ 3,263,466

Currently, the Company has 42 operating leases and one finance lease with an ROU asset and lease liability of $11,852,653 as of March 28, 2020. The finance lease arrangement is immaterial. The basis, terms and conditions of the leases are determined by the individual agreements. The leases do not contain residual value guarantees, restrictions, or covenants that could that could cause the Company to incur additional financial obligations. We rent or sublease a part of one real estate property to a third party. There are no related party transactions. There are no leases that have not yet commenced that could create significant rights and obligations for the Company.

Note E ~~– Recent Accounting Pronouncements~~- Debt

On August 30, 2019, the Company entered into a credit agreement with Santander Bank, N.A., for itself, People’s United Bank, National Association and TD Bank, N.A. as lenders (the “Credit Agreement”), that included a $100 million term portion and a $20 million revolving commitment portion. Proceeds of the term loan were used to repay the Company’s remaining outstanding term loan (and to terminate its existing credit facility) with People’s United Bank, N.A. (approximately $19 million) and to acquire certain subsidiaries of Big 3 Holdings, LLC (collectively “Big 3 Precision”). The term portion of the loan requires quarterly principal payments of $1,250,000 for an 18-month period beginning December 31, 2019. The repayment amount then increases to $1,875,000 per quarter beginning September 30, 2021 and continues through June 30, 2023. The repayment amount then increases to $2,500,000 per quarter beginning September 30, 2023 and continues through June 30, 2024. The term loan is a 5-year loan with the remaining balance due on August 30, 2024. The revolving commitment portion has an annual commitment fee of 0.25% based on the unused portion of the revolver. The revolving commitment portion has a maturity date of August 30, 2024. As of March 28, 2020, the Company has not borrowed any funds on the revolving commitment portion of the facility. The term loan bears interest at a variable rate based on the LIBOR rate plus an applicable margin of 1.25% to 2.25%, depending on the Company’s senior net leverage ratio. Borrowings under the revolving portion bear interest at a variable rate based on, at the Company’s election, a base rate plus an applicable margin of 0.25% to 1.25% or the LIBOR rate plus an applicable margin of 1.25% to 2.25%, with such margins determined based on the Company’s senior net leverage ratio. The Company’s obligations under the Credit Agreement are secured by a lien on certain of

Company’s and its subsidiaries’ assets pursuant to a Pledge and Security Agreement, dated August 30, 2019 with Santander Bank, N.A., as administrative agent.

The Company’s loan covenants under the Credit Agreement require the Company to maintain a senior net leverage ratio not to exceed 4.25 to 1. In addition, the Company is required to maintain a fixed charge coverage ratio to be not less than 1.25 to 1.

On August 30, 2019, the Company entered into an interest rate swap contract with Santander Bank, N.A., with an original notational amount of $50,000,000, which was equal to 50% of the outstanding balance of the term loan on that date. The Company has a fixed interest rate of 1.44% on the swap contract and will pay the difference between the fixed rate and LIBOR when LIBOR is below 1.44% and will receive interest when the LIBOR rate exceeds 1.44%. On March 28, 2020, the interest rate for half ($49.4 million) of the term portion was 3.35%, using a one month LIBOR rate, and 3.19% on the remaining balance ($49.4 million) of the term loan based on a one month LIBOR rate.

The interest rates on the Credit Agreement and the interest rate swap contract are susceptible to changes to the method of determining LIBOR rates and to the potential phasing out of LIBOR after 2021. Information regarding the potential phasing out of LIBOR is provided below.

On July 27, 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. In the United States, efforts to identify a set of alternative U.S. Dollar reference interest rates have been initiated by the Alternative Reference Rates Committee of the Federal Reserve Board and the Federal Reserve Bank of New York. At this time, it is not possible to predict whether any such changes will occur, whether LIBOR will be phased out or any such alternative reference rates or other reforms to LIBOR will be enacted in the United Kingdom, the United States or elsewhere or the effect that any such changes, phase-out, alternative reference rates or other reforms, if they occur, would have on the amount of interest paid on the Company’s LIBOR-based borrowings. Uncertainty as to the nature of such potential changes, phase-out, alternative reference rates or other reforms may materially adversely affect interest rates paid by the Company on its borrowings. Reform of, or the replacement or phasing out of, LIBOR and proposed regulation of LIBOR and other “benchmarks” may materially adversely affect the amount of interest paid on the Company’s LIBOR-based borrowings and could have a material adverse effect on the Company’s business, financial condition and results of operations.

Note F - Stock Options and Awards

The Eastern Company 2010 Executive Stock Incentive Plan (the “2010 Plan”), for officers, other key employees, and non-employee Directors expired in February 2020. On February 19, 2020, the board of directors of the Company adopted, subject to shareholder approval at the 2020 Annual Meeting of Shareholders, The Eastern Company 2020 Stock Incentive Plan (the “2020 Plan”), which is intended to replace the 2010 Plan. The Company has no other exiting plan pursuant to which equity awards may be granted.

Incentive stock options granted under the 2010 Plan must have exercise prices that are not less than 100% of the fair market value of the Company’s common stock on the dates the stock options are granted. Restricted stock awards may also be granted to participants under the 2010 Plan with restrictions determined by the Compensation Committee of the Company’s Board of Directors. Under the 2010 Plan, non-qualified stock options granted to participants will have exercise prices determined by the Compensation Committee of the Company’s Board of Directors. During the first quarter of 2020 and 2019, no stock options or restricted stock were granted that were subject to the meeting of performance measurements. For the first quarter of 2019, the Company used several assumptions which included an expected term of 3.5 years, volatility deviation of 28.88% and a risk free rate of 2.48%.

The 2010 Plan also permits the issuance of Stock Appreciation Rights (“SARs”). The SARs are in the form of an option with a cashless exercise price equal to the difference between the fair value of the Company’s common stock at the date of grant and the fair value as of the exercise date resulting in the issuance of the Company’s common stock. During 2020, the Company did not issue any SARs, and during 2019 36,000 SARs were issued.

Stock-based compensation expense in connection with SARs granted to employees in the first quarter of 2020 was $110,000, and for 2019 was $80,000.

As of March 28, 2020, there were no shares of Company common stock reserved and available for future grant under the 2010 Plan, as it has expired.

The following tables set forth the outstanding SARs for the period specified:

	Three Months Ended March 28, 2020					Year Ended December 28, 2019
	Units			Weighted - Average Exercise Price		Units			Weighted - Average Exercise Price
Outstanding at beginning of period		276,000		$	22.30		189,167		$	21.46
Issued		--			--		96,000			23.65
Exercised		--			--		(1,667	)		19.10
Forfeited		(6,999	)		19.10		(7,500	)		21.20
Outstanding at end of period		269,001			22.39		276,000			22.30

SARs Outstanding and Exercisable
Range of Exercise Prices		Outstanding as of March 28, 2020		Weighted- Average Remaining Contractual Life		Weighted- Average Exercise Price		Exercisable as of March 28, 2020		Weighted- Average Remaining Contractual Life		Weighted- Average Exercise Price
$	19.10-26.30		269,001		3.0	$	22.39		50,001		2.0		19.10

The following tables set forth the outstanding stock grants for the period specified:

	Three Months Ended March 28, 2020				Year Ended December 28, 2019
	Shares		Weighted - Average Exercise Price		Shares		Weighted - Average Exercise Price
Outstanding at beginning of period		25,000	$	—		25,000	$	—
Issued		—		—		—		—
Forfeited		—		—		—		—
Outstanding at end of period		25,000		—		25,000		—

Stock Grants Outstanding and Exercisable
Range of Exercise Prices		Outstanding as of March 28, 2020		Weighted- Average Remaining Contractual Life		Weighted- Average Exercise Price		Exercisable as of March 28, 2020		Weighted- Average Remaining Contractual Life		Weighted- Average Exercise Price
$	0.00		25,000		2.0		—		—		—		—

As of March 28, 2020, outstanding SARs and grants had an intrinsic value of $561,000.

Note G – Share Repurchase Program

On May 3, 2018, the Company announced that its Board of Directors had authorized a new program to repurchase up to 200,000 shares of the Company’s common stock. The Company’s share repurchase program does not obligate it to acquire the Company’s common stock at any specific cost per share. During the first quarter of 2020, the Company repurchased 15,000 shares of its common stock in connection with the share repurchase program. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased As Part of Publicly Announced Plans or Programs		Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs
Balance as of December 28, 2019		40,000	$	26.58		40,000		160,000
December 29, 2019 – March 28, 2020		15,000		24.59		15,000		145,000
Balance as of March 28, 2020		55,000	$	26.04		55,000		145,000

Note H – Revenue Recognition

The Company’s revenues result from the sale of goods and services and reflect the consideration to which the Company expects to be entitled. The Company records revenues based on a five-step model in accordance with FASB Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers." The Company has defined purchase orders as contracts in accordance with ASC Topic 606. For its customer contracts, the Company identifies its performance obligations, which is delivering goods or services, determining the transaction price, allocating the contract transaction price to the performance obligations (when applicable), and recognizes the revenue when (or as) the performance obligation is transferred to the customer. A good or service is transferred when the customer obtains control of that good or service. The Company’s revenues are recorded at a point in time from the sale of tangible products. Revenues are recognized when products are shipped.

Customer volume rebates, product returns, discount and allowance are variable consideration and are recorded as a reduction of revenue in the same period that the related sales are recorded. The Company has reviewed the overall sales transactions for variable consideration and has determined that these costs are not material.

Refer to Note K for revenues reported by segment. The Company has not experienced any impairment losses, has no future performance obligations and does not capitalize costs to obtain or fulfill contracts.

Note I - Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction, and in various states and foreign jurisdictions. With limited exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2015 and is no longer subject to non-U.S. income tax examinations by foreign tax authorities for years prior to 2013.

In ~~January 2017,~~December 2019, the FASB issued ASU ~~No. 2017-01, Business Combinations – Clarifying~~2019-12, Simplifying the ~~Definition~~Accounting for Income Taxes. The changes implemented in ASU 2019-12 include removing exceptions to incremental intraperiod tax allocation of losses and gains from different financial statement components, exceptions to the method of recognizing income taxes on interim period losses and exceptions to deferred tax liability recognition related to foreign subsidiary investments. In addition, ASU 2019-12 requires that entities recognize franchise tax based on an incremental method, requires an entity to evaluate the accounting for step-ups in the tax basis of goodwill as inside or outside of a ~~Business.~~business combination, and removes the requirement to allocate the current and deferred tax provision among entities in standalone financial statement reporting. The ASU ~~2017-01 provides guidance~~also now requires that an entity reflect enacted changes in tax laws in the annual effective rate, and other codification adjustments have been made to ~~assist~~employee stock ownership plans. For public business entities, ~~with evaluating whether transactions should be accounted~~the amendments in ASU 2019-12 are effective for ~~as acquisitions or dispositions of assets or businesses. The amendment is effective for~~fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of ASU 2019-12 is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued. The Company will adopt ASU 2019-12 in 2021.

On March 27, 2020, President Trump signed into law the $2 trillion bipartisan Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) (“The CARES Act”). The CARES Act includes a variety of economic and tax relief measures intended to stimulate the economy, including loans for small businesses, payroll tax credits/deferrals, and corporate

income tax relief. We are analyzing the following components of the CARES Act to determine their effect on our income tax provision:

Net operating losses arising in 2018, 2019, and 2020 taxable years may be carried back to each of the preceding five years, which may result in refunds of prior period corporate income tax. The Company had taxable income in 2018 and 2019, thus we would only benefit from this item of CARES Act relief to the extent we incur a tax net operating loss in 2020 that can be carried back. As of March 28, 2020, a tax net operating loss is not expected for taxable year 2020. In addition, this item of CARES Act relief increased the positive evidence supporting utilization of our gross deferred tax assets due to available income in carryback years; this did not change our overall assessment as we do not have a valuation allowance recorded against our deferred tax assets.

Furthermore, for taxable years beginning before 2021, net operating loss carryforwards and carrybacks to that year may offset 100% of taxable income in the year. Previously, net operating losses generated through 2017 could offset 100% of taxable income, while losses generated after 2017 could only offset 80% of taxable income. The Company had taxable income in 2018 and 2019 and would carry back a loss generated in 2020 if applicable, leaving minimal opportunity to benefit from this item of CARES Act relief.

For taxable years beginning in 2019 and 2020, the interest deduction limitation is increased from 30% to 50% of “adjusted taxable income” (taxable income without interest, tax depreciation and tax amortization) plus interest income. Furthermore, the Company may choose to use the 2019 adjusted taxable income (instead of 2020) in determining the 2020 interest expense limitation. The Company was not subject to an interest limitation in 2019 and therefore expects to use the 2019 adjusted taxable income if needed to avoid or reduce an interest expense limitation in 2020.

A technical correction to the Tax Cuts and Jobs Act permits bonus depreciation and a 15-year straight-line recovery period on qualified improvement property placed in service after December 31, 2017. Prior to this technical correction, such property placed in service after 2017 was subject to the 39-year straight-line recovery period and was ineligible for bonus depreciation. To the extent the Company has eligible improvements in 2020, the Company can claim bonus depreciation which would reduce taxes payable and increase the deferred tax liability for fixed assets.

Other CARES Act corporate income tax provisions will not significantly impact the company, including alternative minimum tax refunds and increases in the charitable contributions deduction limitation.

The Company will also continue to assess the effect of state level tax relief provisions as enacted, such as state net operating loss rule changes and conformity to the federal interest, depreciation and charitable contribution deduction changes.

The total amount of unrecognized tax benefits could increase or decrease within the next 12 months for a number of reasons, including the closure of federal, state and foreign tax years by expiration of the statute of limitations and the recognition and measurement considerations under FASB ASC Topic 740, “Income Taxes.” There have been no significant changes to the amount of unrecognized tax benefits during the three months ended March 28, 2020. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits will not increase or decrease significantly over the next twelve months.

Note J - Retirement Benefit Plans

The Company has non-contributory defined benefit pension plans covering most U.S. employees. Plan benefits are generally based upon age at retirement, years of service and, for the plan covering salaried employees, the level of compensation. The Company also sponsors unfunded non-qualified supplemental retirement plans that provide certain former officers with benefits in excess of limits imposed by federal tax law.

The Company also provides health care and life insurance for retired salaried employees in the United States who meet specific eligibility requirements.

Significant disclosures relating to these benefit plans for the first quarter of fiscal years 2020 and 2019 are as follows:

	Pension Benefits						Postretirement Benefits
	Three Months Ended						Three Months Ended
	March 28, 2020			March 30, 2019			March 28, 2020			March 30, 2019
Service cost	$	266,436		$	263,852		$	10,855		$	8,216
Interest cost		714,143			879,080			11,667			20,346
Expected return on plan assets		(1,365,261	)		(1,190,330	)		(5,589	)		(14,481	)
Amortization of prior service cost		24,845			24,845			(2,063	)		(1,268	)
Amortization of the net loss		325,034			290,549			(6,377	)		(20,507	)
Net periodic benefit cost (benefit)	$	(34,803	)	$	267,996		$	8,493		$	(7,694	)

The Company’s funding policy with respect to its qualified plans is to contribute at least the minimum amount required by applicable laws and regulations. In fiscal year 2020, the Company expects to contribute $2,690,000 into its pension plans and $50,000 into its postretirement plan. As of March 20, 2020, the Company has made contributions of approximately $400,000 into its pension plans, has contributed $11,000 to its postretirement plan and will make the remaining contributions as required during the remainder of fiscal the year.

The Company has a contributory savings plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”) covering substantially all U.S. non-union employees. The 401(k) Plan allows participants to make voluntary contributions from their annual compensation on a pre-tax basis, subject to limitations under the Internal Revenue Code. The 401(k) Plan provides for contributions by the Company at its discretion.

The Company made contributions to the plan as follows:

	For the Three Months Ended
	March 28, 2020		March 30, 2019
Regular matching contribution	$	204,992	$	156,267
Transitional credit contribution		82,127		103,524
Non-discretionary contribution		567,657		587,041
Total contributions made for the period	$	854,776	$	846,832

The non-discretionary contribution of $550,286 made in the three months ended March 28, 2020 was accrued for and expensed in the prior fiscal year.

Note K – Segment Information

Financial information by segment is as follows:

	Three Months Ended
	March 28, 2020			March 30, 2019
Revenues:
Sales to unaffiliated customers:
Industrial Hardware	$	47,236,605		$	38,403,343
Security Products		12,384,484			14,683,004
Metal Products		5,704,527			7,796,801
	$	65,325,616		$	60,883,148

Income before income taxes:
Industrial Hardware	$	3,458,893		$	1,268,140
Security Products		817,401			972,887
Metal Products		(415,023	)		93,281
Operating Profit		3,861,271			2,334,308
Interest expense		(827,664	)		(292,540	)
Other income		744,793			13,925
	$	3,778,400		$	2,055,693

Note L - Recent Accounting Pronouncements

Upcoming

In December 2019, FASB issued ASU 2019-12, Simplifying the Accounting for Income Tax. The changes implemented in ASU 2019-12 include removing exceptions to incremental intraperiod tax allocation of losses and gains from different financial statement components, exceptions to the method of recognizing income taxes on interim period losses and exceptions to deferred tax liability recognition related to foreign subsidiary investments. In addition, ASU 2019-12 requires that entities recognize franchise tax based on an incremental method, requires an entity to evaluate the accounting for step-ups in the tax basis of goodwill as inside or outside of a business combination, and removes the requirement to allocate the current and deferred tax provision among entities in standalone financial statement reporting. The ASU also now requires that an entity reflect enacted changes in tax laws in the annual effective rate, and other codification adjustments have been made to employee stock ownership plans. For public business entities, the amendments in ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years. The amendment should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is evaluating the impact of the new guidance.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment. ASU 2017-04 provides guidance to simplify the subsequent measure of goodwill by eliminating Step 2 from the goodwill impairment test. The amendment is effective for fiscal years, beginning after December 15, ~~2019,~~2020. Early adoption of ASU 2019-12 is permitted, including adoption in any interim period for public business entities for periods ~~within those fiscal years.~~for which financial statements have not yet been issued. The ~~amendment should be applied prospectively with earlier application permitted as~~Company will adopt ASU 2019-12 in 2021. The adoption of this guidance is not expected to have a material impact on the consolidated financial statements of the ~~beginning of an interim or annual reporting period after January 1, 2017. The Company is evaluating the impact of the new guidance.~~

In February 2017, the FASB issued ASU No. 2017-06, Plan Accounting: Defined Benefit Pension Plans (Topic 960); Defined Contribution Pension Plans (Topic 962); Health and Welfare Benefit Plans (Topic 965): Employee Benefit Plan Master Trust Reporting. ASU 2017-06 provides guidance for reporting by an employee benefit plan for its interest in a master trust. The amendment is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The amendment should be applied retrospectively with earlier application permitted as of the beginning of an interim or annual reporting period after December 15, 2018. The Company is evaluating the impact of the new guidance.

In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 provides guidance to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendment is effective for fiscal years beginning after December 15, 2017, including interim periods

~~within those fiscal years. The amendment should be applied retrospectively with earlier application permitted as of~~

~~the beginning of an interim or annual reporting period after December 15, 2017. The Company is evaluating the impact of the new guidance.~~

In September 2017, the FASB issued ASU No. 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840) and Leases (Topic 842). ASU 2017-13 provides guidance regarding amendments to the aforementioned topics following SEC Staff announcement. The amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is evaluating the impact of the new guidance.Company.

The Company has implemented all new accounting pronouncements that are in effect and that could impact its consolidated financial statements and does not believe that there are any other new accounting pronouncements that have been issued, but are not yet effective, that might have a material impact on the consolidated financial statements of the Company.

~~Note F – Debt~~

On January 29, 2010, the Company signed a secured loan agreement (the "Loan Agreement") with People's United Bank, National Association ("People's"), which included a $5,000,000 term portion (the "Original Term Loan") and a $10,000,000 revolving credit portion. On January 25, 2012, the Company amended the Loan Agreement by taking an additional $5,000,000 term loan (the "2012 Term Loan"). Interest on the Original Term Loan portion of the Loan Agreement was fixed at 4.98%. Interest on the 2012 Term Loan was fixed at 3.90%. The interest rate on the revolving credit portion of the Loan Agreement varied based on the LIBOR rate or People's Prime rate plus a margin spread of 2.25%, with a floor rate of 3.25% and a maturity date of January 31, 2014. On January 23, 2014, the Company signed an amendment to the Loan Agreement which extended the maturity date of the $10,000,000 revolving credit portion of the Loan Agreement to July 1, 2016 and changed the interest rate to LIBOR plus 2.25%, eliminating the floor previously in place. On June 9, 2016, the Company signed a third amendment to its secured Loan Agreement which extended the maturity date of the $10,000,000 revolver portion of the Loan Agreement to July 1, 2018. On April 3, 2017, the Company signed an amended and restated loan agreement (the "Restated Loan Agreement") with People's that included a $31 million term portion and a $10 million revolving credit portion. Proceeds of the Restated Loan Agreement were used to repay the remaining outstanding term loans of the Company (approximately $1,429,000) and to acquire 100% of the common stock of Velvac Holdings, Inc. (see Note M). The term portion of the Restated Loan Agreement requires quarterly principal payments of $387,500 for a two-year period beginning July 3, 2017. The repayment amount then increases to $775,000 per quarter beginning July 1, 2019. The term portion of the Restated Loan Agreement is a five-year loan with any remaining outstanding balance due on March 1, 2022. The revolving credit portion of the Restated Loan Agreement has a quarterly commitment fee ranging from 0.2% to 0.375% based on operating results. Under the terms of the Restated Loan Agreement, this quarterly commitment fee will be 0.25% for the first six months. The revolving credit portion of the Restated Loan Agreement has a maturity date of April 1, 2022. On April 3, 2017, the Company borrowed approximately $6.6 million on the revolving credit portion of the Restated Loan Agreement. The Company subsequently paid off $1.6 million on the revolving credit portion leaving a balance on such revolving credit portion of $5 million.

The interest rates on the term portion and the revolving credit portion of the Restated Loan Agreement vary. The interest rates may vary based on the LIBOR rate plus a margin spread of 1.75% to 2.50%. The margin spread is based on operating results calculated on a rolling-four-quarter basis. The Company may also borrow funds at People's Prime rate. On September 30, 2017, the interest rate for one half ($15.3 million) of the term portion was 3.24%, using a 1 month LIBOR rate and 3.30% on the remaining balance ($15.3 million) of the term portion based on a 3 month LIBOR rate. The interest rate on the $5 million of the revolving credit portion was 3.24%.

The Company's loan covenants under the Restated Loan Agreement require the Company to maintain a consolidated minimum debt service coverage ratio of at least 1.1 to 1 for periods through December 31, 2018 and 1.2 to 1 thereafter, which is to be tested quarterly on a twelve-month trailing basis. In addition, the Company will be required to show a maximum total leverage ratio of 4.0x for periods through December 31, 2018, 3.5x for the periods from January 1, 2019 through December 31, 2019, 3.25x for the periods from January 1, 2020 through December 31, 2020 and 3.0x thereafter. The Company was in compliance with all covenants for the three and nine month periods ended September 30, 2017.

On April 4, 2017, the Company entered into an interest rate swap contract with People's with an original notional amount of $15,500,000, which is equal to 50% of the outstanding balance of the term portion of the Restated Loan Agreement on that date. The notional amount will decrease on a quarterly basis beginning July 3, 2017, following the principal repayment schedule of the term portion of the Restated Loan Agreement. The Company has a fixed interest rate of 1.92% on the swap contract and will pay the difference between the fixed rate and the LIBOR rate when the LIBOR rate is below 1.92% and will receive interest when the LIBOR rate exceeds 1.92%.

~~Note G – Goodwill~~

~~The following is a roll-forward of goodwill from year-end 2016 to the end of the third quarter of 2017:~~

Industrial
Hardware
Segment

Security
Products
Segment

Metal
Products
Segment

Total

Beginning balance $ 1,760,793 $ 13,059,042 $ — $ 14,819,835
Investment – Velvac 17,502,024 — — 17,502,024
Foreign exchange 73,881 — — 73,881
Ending balance $ 19,336,698 $ 13,059,042 $ — $ 32,395,740

1115

Note ~~H – Intangibles~~

~~The gross carrying amount and accumulated amortization~~M - Concentration of ~~amortizable intangible assets are as follows:~~

Industrial Hardware Segment Security Products Segment Metal Products Segment Total Weighted-Average Amortization Period (Years)
2017 Gross Amount
Patents and developed technology $ 7,111,906 $ 1,069,594 $ -- $ 8,181,500 12.2
Customer relationships 3,650,000 449,706 -- 4,099,706 9.5
Non-compete agreements -- 407,000 -- 407,000 5.0
Intellectual property -- 307,370 -- 307,370 5.0
Total Gross Intangibles $ 10,761,906 $ 2,233,670 $ -- $ 12,995,576 10.8

2017 Accumulated Amortization
Patents and developed technology $ 1,888,433 $ 663,254 $ -- $ 2,551,687
Customer relationships 182,500 247,338 -- 429,838
Non-compete agreements -- 223,850 -- 223,850
Intellectual property -- 169,054 -- 169,054
Accumulated Amortization $ 2,070,933 $ 1,303,496 $ -- $ 3,374,429

Net September 30, 2017 per Balance Sheet $ 8,690,973 $ 930,174 $ -- $ 9,621,147

2016 Gross Amount
Patents and developed technology $ 2,159,060 $ 1,035,374 $ -- $ 3,194,434 15.6
Customer relationships -- 449,706 -- 449,706 5.0
Non-compete agreements -- 407,000 -- 407,000 5.0
Intellectual property -- 307,370 -- 307,370 5.0
Total Gross Intangibles $ 2,159,060 $ 2,199,450 $ -- $ 4,358,510 12.3

2016 Accumulated Amortization

Patents and developed technology $ 1,529,675 $ 598,756 $ -- $ 2,128,431
Customer relationships -- 179,882 -- 179,882
Non-compete agreements -- 162,800 -- 162,800
Intellectual property -- 122,948 -- 122,948
Accumulated Amortization $ 1,529,675 $ 1,064,386 $ -- $ 2,594,061

Net December 31, 2016 per Balance Sheet $ 629,385 $ 1,135,064 $ -- $ 1,764,449

~~Note I – Retirement Benefit Plans~~risk

The Company has non-contributory defined benefit pension plans covering certain U.S. employees. Plan benefits are generally based upon age at retirement, years of service and, for its salaried plan, the level of compensation. The Company also sponsors unfunded nonqualified supplemental retirement plans that provide certain current and former officers with benefits in excess of limits imposed by federal tax law.

~~The Company also provides health care and life insurance for retired salaried employees in the United States who meet specific eligibility requirements.~~

Effective for fiscal year 2017, the Company changed the method used to measure Service Cost and Interest Cost for pension and other postretirement benefits for the Company's plans. Previously, the Company measured interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligations. For fiscal year 2017, interest costs will be measured by applying the specific spot rates along the yield curve to the plans' corresponding discounted cash flows that comprise the obligation (i.e., the Spot Rate approach). This new method provides a more precise measurement of interest costs by aligning the timing of the plans' discounted cash flows to the corresponding spot rates on the yield curve. The measurement of the Company's pension and other postretirement benefit obligations is not affected. The Company has accounted for this change as a change in accounting estimate, which is applied prospectively. Consequently, combined pension expense for the Company's pension plans and other postretirement plan under the Spot Rate approach for the nine-month period ended September 30, 2017 is approximately $406,000 lower when compared to the prior approach that the Company used.

~~Significant disclosures relating to these benefit plans for the third quarter and first nine months of fiscal years 2017 and 2016 are as follows:~~

Pension Benefits
Nine Months Ended Three Months Ended

September 30, 2017

October 1, 2016

September 30, 2017

October 1, 2016

Service cost $ 952,078 $ 1,612,278 $ 317,360 $ 270,721
Interest cost 2,373,167 2,541,968 791,055 767,625
Expected return on plan assets (3,587,682 ) (3,603,483 ) (1,195,895 ) (1,121,311 )
Amortization of prior service cost 109,312 150,427 36,438 50,143
Amortization of the net loss 923,614 1,319617 307,871 277,469
Net periodic benefit cost $ 770,489 $ 2,020,807 $ 256,829 $ 244,647

Postretirement Benefits
Nine Months Ended Three Months Ended

September 30, 2017

October 1, 2016

September 30, 2017

October 1, 2016

Service cost $ 20,542 $ 21,975 $ 6,847 $ 7,325
Interest cost 60,620 71,154 20,206 23,718
Expected return on plan assets (38,621 ) (35,649 ) (12,874 ) (11,883 )
Amortization of prior service cost (16,083 ) (17,918 ) (5,361 ) (5,973 )
Amortization of the net loss (58,201 ) (70,441 ) (19,400 ) (23,480 )
Net periodic benefit cost $ (31,743 ) $ (30,879 ) $ (10,582 ) $ (10,293 )

The Company's funding policy with respect to its qualified plans is to contribute at least the minimum amount required by applicable laws and regulations. In 2017, the Company expects to contribute $700,000 into its pension plans and $140~~,000 into its postretirement plan. As of September 30, 2017~~, ~~the Company has contributed $322,000 into its pension plans and $109,000 into its postretirement plan and will make the remaining contributions as required during the remainder of the year.~~

The Company has a contributory savings plan under Section 401(k) of the Internal Revenue Code of 1986, as amended covering substantially all non-union employees. The plan allows participants to make voluntary contributions on a pretax basis of their annual compensation, subject to IRS limitations. At its discretion, the Company provides for matching contributions to the plan. The plan also provides for a transitional credit to certain eligible employees who were active participants of the Company's Salaried Retirement Plan at the time that benefits under such plan were frozen in fiscal year 2016, as well as a non-discretionary contribution to all eligible employees.

~~The Company made contributions to the plan as follows:~~

Nine Months Ended Three Months Ended

September 30, 2017

October 1, 2016

September 30, 2017

October 1, 2016

Regular matching contribution $ 346,713 $ 226,090 $ 111,291 $ 94,042
Transitional credit contribution 307,597 136,416 76,526 94,868
Non-discretionary contribution 339,220 51,470 15,987 --
Total contributions for the period $ 993,530 $ 413,976 $ 203,804 $ 188,910

~~The non-discretionary contributions made in each of the periods disclosed above were expensed in the prior fiscal year.~~

~~Note J – Stock Based Compensation~~

The Company accounts for its stock based awards in accordance with Accounting Standards Codification subtopic 718-10, Compensation ("ASC 718-10"), which requires a fair value measurement and recognition of compensation expense for all share-based payment awards made to its employees and directors, including employee stock options and restricted stock awards. The Company estimates the fair value of granted stock options using the Black-Scholes valuation model. This model requires the Company to make estimates and assumptions including, without limitation, estimates regarding the length of time an employee will retain vested stock options before exercising them, the estimated volatility of the Company's common stock price and the number of options that will be forfeited prior to vesting. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Changes in these estimates and assumptions can materially affect the determination of the fair value of stock-based compensation and consequently, the related amount recognized in the Company's consolidated statements of operations.

As of September 30, 2017, the Company had one stock option plan, The Eastern Company 2010 Executive Stock Incentive Plan (the "2010 Plan"), for officers, other key employees, and non-employee directors. Incentive stock options granted under the 2010 Plan must have exercise prices that are not less than 100% of the fair market value of the Company's common stock on the dates the stock options are granted. Restricted stock awards may also be granted to participants under the 2010 Plan with restrictions determined by the Compensation Committee of the Company's Board of Directors. Under the 2010 Plan, non-qualified stock options granted to participants will have exercise prices determined by the Compensation Committee of the Company's Board of Directors. In the third quarter of 2017, no stock options were granted and in the third quarter of 2016, no stock options or restricted stock were granted that were subject to the meeting of performance measurements.

The 2010 Plan also permits the issuance of Stock Appreciation Rights ("SARs"). The SARs are in the form of an option with a cashless exercise price equal to the difference between the fair value of the Company's common stock at the date of grant and the fair value as of the exercise date resulting in the issuance of Company's common stock.

~~During the third quarter of 2017, the Company did not issue any SARs.~~

~~Stock-based compensation expense in connection with SARs granted to employees in the nine months of fiscal year 2017 was approximately $117,222.~~

~~As of September 30, 2017, there were 325,500 shares of common stock reserved and available for future grant under the above noted 2010 Plan.~~

~~The following tables set forth the outstanding stock options and SARs for the period specified:~~

Three Months Ended
September 30, 2017

Year Ended
December 31, 2016

Shares Weighted - Average Exercise Price Shares Weighted - Average Exercise Price
Outstanding at beginning of period 174,500 $ 20.39 -- $ --
Issued -- -- -- --
Outstanding at end of period 174,500 20.39 -- --

SARs and Options Outstanding and Exercisable
Range of Exercise Prices
Outstanding as of
September 30, 2017
Weighted- Average Remaining Contractual Life Weighted- Average Exercise Price
Exercisable as of
September 30, 2017
Weighted- Average Remaining Contractual Life Weighted- Average Exercise Price
$19.10-21.10 174,500 4.4 $20.39 -- -- --

~~As of September 30, 2017, outstanding SARs and options had an intrinsic value of $1,968,950.~~

~~Note K – Income Taxes~~

The Company files federal income tax returns as well as tax returns in various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2013 and foreign income tax examinations by tax authorities prior to 2011.

The total amount of unrecognized tax benefits could increase or decrease within the next twelve months for a number of reasons, including the closure of federal, state and foreign tax years as a result of the expiration of applicable statutes of limitation and the recognition and measurement considerations under FASB Accounting Standards Codification ("ASC") 740. There have been no significant changes to the amount of unrecognized tax benefits during the nine months ended September 30, 2017. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits will not increase or decrease significantly over the next twelve months.

~~Note L - Financial Instruments and Fair Value Measurements~~

~~Financial Risk Management Objectives and Policies~~

~~The Company is exposed primarily to credit, interest rate and currency exchange rate risks which arise in the ordinary course of business.~~

~~Credit Risk~~

Credit risk is the potential financial loss resulting from the failure of a customer or counterparty to settle its financial and contractual obligations to the Company, as and when they become due. The primary credit risk for the Company is its accounts receivable due from customers. The Company has established credit limits for customers and monitors their balances to mitigate the risk of loss. As ~~September 30, 2017 and~~of March 28, 2020, there was one significant concentration of credit risk with a customer that has receivables due of $4,205,000 representing 11% of our total accounts receivable. As of December ~~31, 2016,~~28, 2019, there were no significant concentrations of credit risk. No single customer represented more than 10% of the ~~Company's~~Company’s net accounts receivable as of ~~September 30, 2017 or at~~ December ~~31, 2016.~~28, 2019. The maximum exposure to credit risk is primarily represented by the carrying amount of the ~~Company's~~Company’s accounts receivable.

Interest Rate Risk

The ~~Company's~~Company’s exposure to the risk of changes in market interest rates relates primarily to the ~~Company's~~Company’s debt, which bears interest at variable rates based on the LIBOR rate plus a margin spread of ~~1.75%~~1.25% to ~~2.50%~~2.25%. The Company has an interest rate swap with a notional amount of ~~$15,306,250~~$49,375,000 on ~~September 30, 2017~~March 28, 2020, to convert a portion ~~of its 2017 Term Loan~~the borrowing under the Credit Agreement from variable to fixed rates. The valuation of this swap is determined using the ~~three~~one month LIBOR rate index and mitigates the Company's exposure to interest rate risk.

~~Fair Value Measurements~~

~~Assets and liabilities that require fair value measurement are recorded at fair value using market and income valuation approaches and considering~~ Additionally, interest rates on the Company's debt are susceptible to changes to the method that LIBOR rates are determined and ~~counterparty's credit risk.~~to the potential phasing out of LIBOR after 2021. The ~~Company uses~~potential phasing out of LIBOR is discussed in greater detail in Note E—Debt hereof and under the ~~market approach and the income approach to value assets and liabilities as appropriate. The assets or liabilities requiring fair value measurements on September 30, 2017 are as follows:~~

Fair Value Level 1 Level 2 Level 3
Financial Liabilities
Interest rate swap

$ 82,302

$ --

$ 82,302

$ --
Total liabilities $ 82,302 $ -- $ 82,302 $ --

~~The Company's interest rate swap is not an exchange-traded instrument. However, it is valued based on observable inputs for similar liabilities and accordingly is classified as Level 2. The amount~~heading “The phase out of the London Interbank Offered Rate (LIBOR), or the replacement of LIBOR with a different reference rate, may adversely affect interest ~~rate swap is included~~rates” in ~~other accrued liabilities.~~Part I, Item 1A of the 2019 Annual Report.

~~Note M – Business Combination~~

On April 3, 2017, the Company completed the Acquisition of Velvac for $39.5 million and earnout consideration contingent upon Velvac achieving minimum earning performance levels with the amount of any such earnout consideration based on a specified percentage (7.5% or 15%)of sales of Velvac's new proprietary Road-iQ product line (the "Earnout Consideration") measured over annual calculation periods through April 2022, set forth in the Securities Purchase Agreement, subject to certain customary post-closing adjustments. Velvac is a premier designer and manufacturer of proprietary vision technology for original equipment manufacturers serving the heavy-duty and medium-duty truck, motorhome, and bus markets.Currency Exchange Rate Risk

The ~~goodwill of $17,502,000 arising from~~Company’s currency exposure is concentrated in the ~~acquisition consist~~Canadian dollar, Mexican peso, New Taiwan dollar, Chinese RMB and the Hong Kong dollar. Because of the ~~difference between the consideration paid~~Company’s limited exposure to any single foreign market, any currency gains or losses have not been material and ~~the fair value of the assets and liabilities acquired. None of the goodwill recognized is~~are not expected to be ~~deductible for income tax purposes. The following table summarizes~~material in the ~~consideration paid for Velvac and~~future. As a result, the ~~amounts of the assets acquired and liabilities assumed recognized at~~Company does not attempt to mitigate its foreign currency exposure through the acquisition ~~date, as well as the fair value at the acquisition date.~~of any speculative or leveraged financial instruments.

~~At April 3, 2017:~~

Consideration
Cash $ 4,078,000
Debt 36,000,000
Contingent consideration arrangement 2,070,000
$ 42,148,000
Recognized amounts of identifiable assets acquired and liabilities assumed
Accounts receivable $ 6,063,429
Inventory 12,992,377
Prepaid and other assets 494,617
Property plant and equipment 3,911,767
Other noncurrent assets 366,401
Other intangible assets 11,560,000
Current liabilities (7,720,591 )
Deferred tax liabilities (3,022,000 )
Total identifiable net assets 24,646,000
Goodwill 17,502,000
$ 42,148,000

The Company determined the acquisition date fair value of the contingent consideration obligation using the Income Approach method which is a valuation technique that provides an estimate of the fair value of an asset based on the market participant expectations of the cash flows that an asset would generate over a period of time. The contingent consideration obligation was based on weighted projected cash flows discounted back to present value equivalents at a risk adjusted discount rate. The Velvac earnout is contingent upon the ability of Velvac to reach certain EBITDA targets over the course of the next five years. At each annual period, the Company will revalue the contingent consideration obligation to estimated fair value and record changes in fair value as income or expense in the Company's consolidated statement of operations.

~~Accounts Receivable~~

~~Acquired receivables are amounts due from customers.~~

~~Inventories~~

The estimated fair value of inventories acquired included a purchase price adjustment of $11,804,709 above the seller's original cost basis of $1,187,668. The entire amount was charged to cost of sales in the second quarter of 2017.

~~Intangible Assets~~

The estimated fair value of identifiable intangible assets is determined primarily using the Income Approach method which is a valuation technique that provides an estimate of the fair value of an asset based on the market participant's expectations of the cash flows that an asset would generate over its remaining useful life. Some of the more significant assumption inherent in the development of the identifiable intangible assets valuation, from the perspective of a market participant, include the estimate net cash flows for each year for each project or product, the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset's life cycle, competitive trends impacting the asset and each cash flow stream as well as other factors.

~~Goodwill Allocation~~

Among the primary reasons why the Company entered into the Velvac acquisition and the factors that contributed to a purchase price resulting in the recognition of goodwill were Velvac's history of operating margins and profitability, Velvac's strong research and development center, including its Road-iQTM 360-degree view camera, recording and communication system and TrailerLinkTM, a new patent-pending solution that supports trailer-to-trailer video and data communications, the expansion of the Company's commercial footprint on a nationwide basis as a result of the Velvac acquisition, and key pipeline additions of Velvac products which will enable the Company to expand its product offerings and offer its customers a greater breadth of products.

~~Acquisition Related Expenses~~

Included in general and administrative expenses in the consolidated statements of operations for the three and nine month periods ended September 30, 2017 were $102,000 and $863,000, respectively, for acquisition expenses.

ITEM 2 – ~~MANAGEMENT'S~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to highlight significant changes in the ~~Company's~~ financial position and results of operations of The Eastern Company (together with its consolidated subsidiaries, the “Company,” “we,” “us” or “our”) for the ~~thirteen weeks~~quarter ended ~~September 30, 2017.~~March 28, 2020. The interim financial statements and this ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the fiscal year ended December ~~31, 2016~~28, 2019 and the related ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in the ~~Company's Annual~~Company’s 2019 Form 10-K, which was filed with the SEC on March 5, 2020 (the “2019 Form 10-K”).

The Company’s fiscal year is a 52-53-week fiscal year ending on the Saturday nearest to December 31. References to fiscal 2019 or the 2019 fiscal year mean the 52-week period ended on December 28, 2019 and references to fiscal 2020 or the 2020 fiscal year mean the 53-week period ending on January 2, 2021. In a 52-week fiscal year, each quarter is 13 weeks long. In a 53 week fiscal year, each of the first two fiscal quarters and the fourth quarter are 13 weeks long, and the third fiscal quarter is 14 weeks long. References to the first quarter of fiscal 2019, the first fiscal quarter of 2020 or the three months ended March 30, 2019 mean the 13-week period from December 30, 2018 to March 30, 2019. References to the first quarter of fiscal 2020, the first fiscal quarter of 2020 or the three months ended March 28, 2020 mean the 13-week period from December 29, 2019 to March 28, 2020.

Safe Harbor for Forward-Looking Statements

Statements contained in this Quarterly Report on Form ~~10-K for the fiscal year ended December 31, 2016 ("2016 Annual Report~~10-Q that are not based on ~~Form 10-K").~~

~~Certain statements set forth in this discussion and analysis of financial condition and results of operations~~historical facts are ~~forward-looking statements~~“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. ~~They~~Forward-looking statements may be identified by the use of forward-looking terminology such ~~words~~ as ~~"may," "will," "expect," "believe," "plan"~~“should,” “could,” “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” or similar terms or variations of those terms or the negative of those terms. There are many factors that affect the Company’s business and ~~other similar terminology.~~the results of its operations and that may cause the actual results of operations in future periods to differ materially from those currently expected or anticipated. These ~~statements reflect management's current expectations regarding future events and operating performance and speak only as~~factors include, but are not limited to: effects of the ~~date~~COVID-19 pandemic and the measures being taken to limit the spread of ~~this report. These forward-looking statements involve~~COVID-19, including supply chain disruptions, delays in delivery of our products to our customers, impact on demand for our products, reductions in production levels, increased costs, including costs of raw materials, the impact on global economic conditions, and the availability, terms and cost of financing, including borrowings under the Credit Agreement; risks associated with doing business overseas, including fluctuations in exchange rates and the inability to repatriate foreign cash, the impact on cost structure and on economic conditions as a ~~number~~result of ~~risks~~actual and ~~uncertainties,~~threatened increases in trade tariffs and ~~actual future results~~the impact of political, economic and ~~trends may differ materially depending~~social instability; restrictions on ~~a variety~~operating flexibility imposed by the agreement governing our credit facility; the inability to achieve the savings expected from global sourcing of ~~factors, including, without limitation, changing customer preferences, lack~~materials; the impact of ~~success of~~higher raw material and component costs, particularly steel, plastics, scrap iron, zinc, copper and electronic components; lower-cost competition; our ability to design, introduce and sell new products ~~loss~~and related components; market acceptance of our products; the inability to attain expected benefits from acquisitions or the inability to effectively integrate such acquisitions and achieve expected synergies; domestic and international economic conditions, including the impact, length and degree of economic downturns on the customers ~~competition, increased raw material prices, problems~~and markets we serve and more specifically conditions in the automotive, construction, aerospace, energy, oil and gas, transportation, electronic, commercial laundry, mining and general industrial markets; costs and liabilities associated with ~~foreign sourcing~~environmental compliance; the impact of parts and products, changes within the Company's industry segments and in the overall economy, litigation and legislation, and other factors included in and incorporated by reference in Item 1A of our most recently filed Annual Report on Form 10-K, as amendedclimate change or ~~supplemented in our reports subsequently filed with the Securities and Exchange Commission ("SEC"), Item 1A of this Part II of this report. In addition,~~ terrorist threats and the possible responses by the ~~United States~~U.S. and foreign ~~governments, the effects on consumer demand, the financial markets, the travel industry, the trucking industry~~governments; failure to protect our intellectual property; cyberattacks; and other conditions increase the uncertainty inherent in forward-looking statements. Forward-looking statements reflect the expectations of the Company at the time they are made, and investors should rely on them only as expressions of opinion about what may happen in the future and only at the time they are made. The Company undertakes no obligation to update any forward-looking statement.materially adverse or unanticipated legal judgments, fines, penalties or settlements. Although the Company believes it has an appropriate business strategy and the resources necessary for its operations, future revenue and margin trends cannot be reliably predicted and the Company may alter its business strategies to address changing conditions.

~~In addition,~~ Also, the Company makes estimates and assumptions that may materially affect reported amounts and disclosures. These relate to valuation allowances for accounts receivable and ~~for~~ excess and obsolete inventories, accruals for pensions and other postretirement benefits (including forecasted future cost increases and returns on plan assets), provisions for depreciation (estimating useful lives), uncertain tax positions, and, on occasion, accruals for contingent losses.

~~On April 3, 2017, the~~ The Company ~~completed its acquisition~~undertakes no obligation to update, alter, or otherwise revise any forward-looking statements, whether written or oral, that may be made from time to time, whether as a result of Velvac Holdings, Inc., a Delaware corporation including its subsidiaries ("Velvac"), pursuant to a Securities Purchase Agreement (the "Securities Purchase Agreement"), dated April 3, 2017, by and among Jeffery R. Porter, W. Greg Bland, John Backovitch, Dave Otto, Bob Otto, Timothy Rintelman, Robert Brester, Dan McGrew, Mark Moeller and Prospect Partners II, L.P. (collectively, the "Sellers"). Pursuant to the Securities Purchase Agreement, the Company acquired 100% of the issued and outstanding stock of Velvac from the Sellers (the "Acquisition") for $39.5 million and earnout consideration contingent upon Velvac achieving minimum earnings performance levels with the amount of any such earnout consideration based on a specific percentage (either 7.5%new information, future events, or 15%) of sales of Velvac's new proprietary Road-iQ product line measured over annual calculation periods through April 2022, as set forth in the Securities Purchase Agreement (the "Earnout Consideration"), subject to certain customary post-closing adjustments. The Acquisition was financed with a $31 million term loan from People's United Bank, National Association ("People's"), a $5 million draw down on the Company's $10 million revolving credit facility with People's and $3.5 million in cash. Please refer to the Form 8-K filed on April 7, 2017 and the amendment thereto files on June 19, 2017 for further details.

otherwise.

1817

Overview

~~Sales~~COVID-19 update

As of March 2020, there have been significant impacts to the Company’s operations due to the COVID-19 pandemic and actions taken to slow the spread of COVID-19, and we expect those impacts to continue for some time.

Across the Company, we have implemented a broad range of policies and procedures to ensure that employees at all of our locations remain healthy. We listened to and learned a great deal from our colleagues in China, who began feeling the impact of COVID-19 in late 2019, and took early-on decisive action across our North American operations, accordingly. Steps that we have taken to reduce COVID-19 risk to our employees include, among others: implementing social distancing measures, staggering staff and shifts, enabling work from home for as many employees as possible, and implementing an enhanced cleaning program across all sites. We are advising our employees on the importance of wearing facemasks to reduce the spread COVID-19. As government authorities implement restrictions on commercial operations, we continue to ensure compliance with these directives in order to maintaining business continuity for our essential operations. We continue to seek and implement additional methods to further reduce COVID-19 risk to our employees.

The Company has operations in Shanghai and Dongguan China that have been impacted by COVID-19. The virus led to a chain of events that interfered with our ability, and the ability of certain suppliers of ours, to conduct business. We source approximately 15% of our products and components from China. As a result of government mandated shutdowns at our facilities, and those of certain suppliers, in China, many of the products that we have ordered have been delayed by approximately four to six weeks, which has resulted in and is likely to continue to result in a comparable delay in our product shipments to our customers through May 2020. By mid-March 2020, COVID-19 had begun to spread across the United States, which precipitated the closure by government authorities of non-essential businesses. The majority of our businesses are deemed essential and have accordingly remained open, albeit at reduced levels. Many of our customers operating in both automotive/transportation and non-automotive/transportation markets experienced varying degrees of shutdowns beginning in the ~~third~~last week of March, and are, on a case-by-case basis, tentatively expected to begin reopening as soon as May 4, 2020. We estimate the adverse financial impact of COVID-19 on our first quarter operating profit to be an approximate $0.6 million reduction net of tax. The broader economic fallout caused by COVID-19 may result in unfavorable operating earnings and cash flow generation in the months to follow.

Any sustained delays or disruptions in our supply chain and operations in China, and any ongoing shutdowns of the operations of our customers would continue to have a negative effect on demand for our products and our ability to fulfill orders on a timely basis or at all, which in turn would adversely affect our financial condition, results of operations and cash flow. In addition, the broader economic fallout caused by COVID-19 may result in unfavorable operating earnings and cash flow generation in the months to follow, including as a result of decreased consumer demand for our and our customers’ products. The extent of the pandemic’s effect on our operational and financial performance will depend in large part on future developments, which cannot be predicted with confidence at this time. Future developments include the duration, scope and severity of the pandemic, actions that may continue to be taken to contain or mitigate its impact, such as the extent of restrictions on gatherings and travel, the impact on governmental programs and budgets, the development of treatments or vaccines, and the resumption of widespread economic activity. Although the inherent uncertainty of the unprecedented and rapidly evolving crisis makes it difficult to predict with any confidence the likely impact of the COVID-19 pandemic on our future operations, the COVID-19 pandemic could have a material adverse impact on our consolidated business, results of operations and financial condition. For a discussion of certain COVID-19-related risks, see Part II, Item 1A – Risk Factors of this Form 10-Q.

Net sales in the first quarter of ~~2017~~2020 increased ~~67% when compared~~7% to $65.3 million from $60.9 million in the ~~third quarter~~prior year period. Sales growth includes the impact of ~~2016.~~the acquisition of certain subsidiaries of Big 3 Holdings LLC (collectively, Big 3 Precision), which the Company acquired on August 30, 2019. Sales increased in the Industrial Hardware segment by ~~117%~~23% to $47.2 million in the ~~third~~first quarter of ~~2017, primarily as a result of sales generated~~2020 from ~~the Velvac acquisition. Excluding Velvac's sales~~$38.4 million in the ~~third~~first quarter of ~~2017,~~2019. Excluding Big 3 Precision, sales decreased 11% in the Industrial Hardware segment ~~would have increased 12% when~~first quarter of 2020 compared to sales in the ~~third~~first quarter of ~~2016.~~

~~Sales increased 50%~~2019, due to lower sales to distribution, Class 8 truck, recreational vehicles, and aftermarket truck replacement part. Increased sales into the specialty vehicle, off-highway and military markets were insufficient to offset declines in the ~~Metals segment and sales~~aforementioned markets in the second half of March when certain of our customers closed their operations due to actions taken to help stop the spread of COVID-19. Sales in the Security Products segment ~~increased 18%, when compared to~~decreased 16% in the ~~third~~first quarter of 2016. Sales volume of existing products which include the sales of Velvac products increased by 61% in the third quarter of 2017 compared to the third quarter of 2016. The third quarter of 2017 was favorably affected by the introduction of new products which increased sales by 6%. Sales of new products in the Metals Segment included numerous types of pipe and gas fittings for the oil, water and gas industries. Sales of new products in the Industrial Hardware Segment included Class 8 truck tumbler paddles, latch brackets, and panels. Sales of new products in the Security Products Segment included locking kits for the motorcycle market and connecting rods for the vehicle market.

Sales for the first nine months of 2017 increased 45% compared to the corresponding prior year period, primarily as a result of the Velvac acquisition. Excluding Velvac's sales for the nine months ended September 30, 2017, sales in the Industrial Hardware segment would have increased by 13% when2020 compared to the first ~~nine months~~quarter of ~~2016. Sales volume~~2019, due to lower demand across the majority of ~~existing products,~~the markets we serve including distribution, industrial, vehicular accessories and commercial laundry, as well as a loss of supply contracts for

mechatronic padlock systems and recreational vehicles door latches, which ~~include the~~generated sales ~~of Velvac products, increased by 40%~~ in the first ~~nine months~~quarter of ~~2017~~2019, that did not recur in 2020. Sales in the Metal Products segment decreased 27% in the first quarter of 2020, compared to sales in the first quarter of 2019. Sales of mining products decreased 21%, and sales of industrial casting products decreased 35%, in the first quarter of 2020 compared to the first ~~nine months~~quarter of ~~2016. The results~~2019. Mining sales in the first quarter were impacted by a combination of growing renewable energy capacity, extremely low natural gas prices and unusually warm weather in the first quarter, which led utilities to cut back on coal usage. Sales of industrial castings in the first quarter were negatively impacted by the loss of a customer who temporarily sourced products from us due to a fire at its facility in 2018, which temporarily shut down production of products that would otherwise have been sourced internally. In addition, sales were negatively impacted due to the completion of contract from a customer serving the transit industry.

Net sales of existing products increased in the first quarter by 5% and price increases and new products effected 2% increase in net sales in the 2020 period. New products included a handle and finger pull assembly, emergency door latch, mount plate latch, top mount power lock module, crossbar lock assembly and various industrial castings for the ~~nine months ended September 30, 2017 were favorably affected by~~water and gas industries.

Cost of products sold in the ~~introduction~~first quarter of ~~new products which~~2020 increased ~~sales by 5%. The Industrial Hardware segment sales increased 83%, Metal Products segment increased 45%, and Security Products segment increased by 6% as~~$3.6 million, or 8% compared to the first ~~nine months~~quarter of ~~2016.~~2019. The primary reason for the increase is due to the inclusion of Big 3 Precision in the first quarter of 2020. Excluding Big 3 Precision, cost of products sold would have decreased by 14%, reflecting the decrease in sales. Material costs decreased by $6.3 million on lower sales volume and lower material costs incurred in producing a new Class 8 truck mirror program that was awarded to us in 2018. We have been successful in securing more favorable pricing from new suppliers on all of the components related to this program, which has enabled us to realize comparatively higher margins on products sold in the first quarter of 2020 compared to those sold in the first quarter of 2019. In addition, raw material costs have decreased year-over-year, hot-rolled steel decreased 16%, cold-rolled steel decreased 7%, aluminum decreased 11%, and copper and zinc and scrap iron decreased 7%, 17%, and 17%, respectively. Also, favorably impacting the first quarter was lower freight cost of $0.6 million, a 33% reduction over the first quarter of 2019, due to the elimination of certain supplier quality issues and expedited shipping costs. Lower production levels resulted in the under-absorption of operating costs in the amount of $0.3 million during the first quarter of 2020 compared to the first quarter in 2019.

~~For~~Finally, the ~~three months ended September 30, 2017, gross margin was 21%~~company experienced tariff costs on China-sourced products of approximately $1.4 million in the first quarter of 2020 compared to ~~28% for~~$0.2 million incurred in the ~~comparable period~~first quarter of ~~2016. This decrease~~2019, all of which have been recovered through price increases.

Gross margin as a percent of sales was ~~primarily~~22% in the ~~result~~first quarter of 2020 compared to 23% in the first quarter of 2019.

Product development expense decreased $1.5 million, or 65%, in the first quarter of 2020 compared to the first quarter of 2019. The reduction in this expense relates to the closure of the Velvac ~~acquisition. Excluding Velvac, the gross margin would have been 24%~~Road-iQ development operation in Bellingham, Washington, which took place in the ~~third~~second quarter of ~~2017. Gross margin for the first nine months of 2017 was 24% compared~~2019, a strategic decision that we made to ~~25% for the prior year period.~~

For the three and nine months ended September 30, 2017, engineering expense increased $1.2 million or 179% and $2.2 million or 109% from the comparable periods in 2016. This increase is primarily relatedadopt a leaner approach to the ~~accelerated~~ development of new ~~technology~~ vision products at Road-iQ, a division of Velvac and gPay, a mobile app to transact credit card payments to laundry equipment, at Greenwald Industries. Road-iQ is a connected vehicle technology that provides both active and passive safety to drivers of RV's , trucks and other specialty vehicles. The Company expects these new products to be ready for market latter in the fourth quarter of 2017.products.

Selling and administrative ~~costs~~expense increased ~~$1.1~~$1.6 million, or ~~20%~~19%, in the ~~third~~first quarter of ~~2017~~2020 compared to the ~~third~~first quarter of ~~2016~~2019, primarily as a result of the inclusion of Big 3 Precision in the ~~Velvac acquisition.~~2020 period. Excluding ~~Velvac's~~Big 3 Precision, selling and administrative costs in the third quarter of 2017, selling and administrative costs would have increased $0.3 million or 5% compared to the third quarter of 2016. Selling and administrative costs increased $7.7 million or 47%expense in the first ~~nine months~~quarter of ~~2017~~2020 would have decreased by $0.5 million, or 6%, from the first quarter of 2019. The most significant factor contributing to this reduction was a decrease in payroll and payroll related costs of $0.3 million.

We incurred no restructuring costs during the first quarter of 2020 compared to restructuring costs of $0.8 million during the first quarter of 2019, which were related to the consolidation of our Salisbury, North Carolina composite panel business into our Canadian composite panel business in Kelowna, British Columbia. Costs incurred related to the write off of inventory and fixed assets, moving, severance and the termination of a lease.

Interest expense increased $0.5 million in the first quarter of 2020 compared to the first ~~nine months~~quarter of ~~2016. Excluding Velvac's selling and administrative costs~~2019 as a result of increased debt related to our acquisition of Big 3 Precision in August of 2019.

Other income increased $0.7 million in the first ~~nine months~~quarter of ~~2017, selling and administrative costs would have increased $1.9 million or 11%~~2020 compared to the ~~nine months~~first quarter of ~~2016. Selling~~2019 due to a favorable return on our pension plan assets and ~~administrative costs were adversely impacted by several one-time charges, which included personnel charges~~a onetime sale-leaseback transaction gain.

Net income for the first quarter of ~~$0.2~~2020 increased to $2.9 million, or $0.46 per diluted share, from $1.6 million, or $0.25 per diluted share, for the comparable period in 2019. During the ~~Security segment, environmental~~first quarter of 2019, the Company had significant non-recurring restructuring costs of ~~$0.4~~$0.8 million, ~~in the Metal Products segment, and acquisition~~as well as project startup costs ~~of $0.9 million in the Industrial Hardware segment.~~

In general, raw material prices increased in 2017compared to 2016 and are expected to increase during the fourth quarter of 2017. The Company tries to recover these costs through price increases when possible. Cost reduction in components along with manufacturing efficiency help to minimize the impact of commodity price increases. Currently, there is no indication that the Company will be unable to obtain supplies of all the raw materials that it requires.

The Company generated approximately $10,174,000 of cash from its operations during the first nine months of 2017 compared to generating approximately $8,983,000 during the same period in 2016. This increase was primarily duerelated to the increase in earnings and cash flow generation in the Company's Metal Products segment. Cash on hand and cash flow from operations, along with the controlling of discretionary expenditures, are anticipatednew Class 8 truck mirror program awarded to ~~be sufficient to enable the Company to meet its existing obligations.~~our Velvac subsidiary.

A more detailed analysis of the ~~Company's~~Company’s results of operations and financial condition follows:

1920

Results of Operations

The following table shows, for the periods indicated, selected line items from the condensed consolidated statements of operations as a percentage of net sales, by ~~segment:~~segment for the period indicated:

	Three Months Ended March 28, 2020
	Industrial			Security			Metal
	Hardware			Products			Products			Total
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of products sold		77.4	%		68.9	%		97.6	%		77.6	%
Gross margin		22.6	%		31.1	%		2.4	%		22.4	%

Product development expense	0.2	%	5.5	%	—		1.2	%
Selling and administrative expense	15.1	%	19.0	%	9.7	%	15.3	%
Restructuring cost	—		—		—		—
Operating profit	7.3	%	6.6	%	-7.3	%	5.9	%

	Three Months Ended September 30, 2017												Three Months Ended March 30, 2019
	Industrial			Security			Metal						Industrial			Security			Metal
	Hardware			Products			Products			Total			Hardware			Products			Products			Total
Net sales		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Cost of products sold		80.6	%		70.5	%		88.8	%		78.7	%		76.9	%		70.9	%		91.3	%		78.7	%
Gross margin		19.4	%		29.5	%		11.2	%		21.3	%		23.1	%		29.1	%		8.7	%		22.7	%

Engineering expense		4.1	%		3.0	%		--			3.3	%
Product development expense														4.2	%		4.3	%		—			3.7	%
Selling and administrative expense		9.8	%		16.5	%		9.0	%		11.6	%		13.4	%		18.1	%		7.5	%		13.8	%
Restructuring cost														2.2	%								1.4	%
Operating profit		5.5	%		10.0	%		2.2	%		6.4	%		3.3	%		6.7	%		1.2	%		3.8	%


	Three Months Ended October 1, 2016
	Industrial			Security			Metal
	Hardware			Products			Products			Total
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of products sold		72.7	%		65.7	%		88.8	%		72.0	%
Gross margin		27.3	%		34.3	%		11.2	%		28.0	%

Engineering expense		0.9	%		3.8	%		--			2.0	%
Selling and administrative expense		16.1	%		18.7	%		9.5	%		16.3	%
Operating profit		10.3	%		11.8	%		1.7	%		9.7	%

The following table shows the ~~amount of~~ change ~~for the third quarter of 2017 compared to the third quarter of 2016~~ in sales ~~cost of products sold, gross margin, engineering expense, selling and administrative expenses~~ and operating profit by segment for the first quarter of 2020 compared to the first quarter of 2019 (dollars in thousands):

Industrial Security Metal
Hardware Products Products Total
Net sales $ 17,749 $ 2,467 $ 2,314 $ 22,530

         Volume 110.2 % 16.0 % 30.3 % 60.8 %
         Prices -0.4 % -0.1 % 3.0 % 0.2 %
         New products 6.9 % 2.2 % 16.8 % 6.3 %
116.7 % 18.1 % 50.1 % 67.3 %

Cost of products sold $ 15,495 $ 2,393 $ 2,051 $ 19,939
140.2 % 26.7 % 50.0 % 82.7 %

Gross margin $ 2,254 $ 74 $ 263 $ 2,591
54.2 % 1.6 % 50.9 % 27.5 %

Engineering expense $ 1,215 $ (30 ) -- $ 1,185
845 % -5.8 % 178.6 %

Selling and administrative expenses $ 800 $ 99 $ 184 $ 1,083
32.8 % 3.8 % 41.8 % 19.9 %

Operating profit $ 239 $ 5 $ 79 $ 323
15.2 % 0.3 % 103.6 % 9.9 %

~~The following table shows, for the periods indicated, selected line items from the condensed consolidated statements of income as a percentage of net sales, by segment:~~

Nine Months Ended September 30, 2017
Industrial Security Metal
Hardware Products Products Total
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of products sold 77.1 % 69.8 % 84.8 % 75.9 %
Gross margin 22.9 % 30.2 % 15.2 % 24.1 %

Engineering expense 3.3 % 3.0 % -- 2.8 %
Selling and administrative expense 16.2 % 17.9 % 9.7 % 15.8 %
Operating profit 3.4 % 9.3 % 5.5 % 5.5 %

Nine Months Ended October 1, 2016
Industrial Security Metal
Hardware Products Products Total
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of products sold 74.7 % 69.2 % 97.1 % 75.4 %
Gross margin 25.3 % 30.8 % 2.9 % 24.6 %

Engineering expense 0.8 % 3.7 % -- 1.9 %
Selling and administrative expense 16.3 % 16.8 % 9.8 % 15.6 %
Operating profit 8.2 % 10.3 % -6.9 % 7.1 %

The following table shows the amount of change for the first nine months of 2017 compared to the first nine months of 2016 in sales, cost of products sold, gross margin, engineering expense, selling and administrative expenses and operating profit, by segment (dollars in thousands):

	Industrial			Security			Metal						Industrial			Security			Metal
	Hardware			Products			Products			Total			Hardware			Products			Products			Total
Net sales	$	37,812		$	2,510		$	6,312		$	46,634		$	8,833		$	(2,299	)	$	(2,092	)	$	4,442

Volume		77.4	%		4.2	%		29.7	%		40.0	%		20.9	%		-17.0	%		-30.2	%		5.2	%
Prices		-0.3	%		-0.1	%		2.8	%		0.2	%		1.1	%		1.0	%		0.7	%		1.0	%
New products		5.7	%		1.6	%		12.4	%		4.9	%		1.0	%		0.4	%		2.6	%		1.1	%
		82.8	%		5.7	%		44.9	%		45.1	%		23.0	%		-15.6	%		-26.9	%		7.3	%

Cost of products sold	$	30,265		$	2,005		$	3,623		$	35,893
		88.7	%		6.6	%		26.6	%		46.0	%

Gross margin	$	7,547		$	505		$	2,689		$	10,741
		65.2	%		3.7	%		658.3	%		42.2	%

Engineering expense	$	2,402		$	(230	)		--		$	2,172
		626.9	%		-14.3						109.0	%

Selling and administrative expenses	$	6,038		$	963		$	588		$	7,589
		81.3	%		13.1	%		42.6	%		47.0	%

Operating profit	$	(893	)	$	(228	)	$	2,101		$	980		$	2,191		$	(156	)	$	(508	)	$	1,527
		-23.7	%		-5.1	%		216.1	%		13.4	%		172.7	%		-16.0	%		-544.9	%		65.4	%

Industrial Hardware Segment

Net sales in the Industrial Hardware segment ~~were up 117% in the third quarter of 2017 and 83%~~increased 23% in the first nine months of 2017 compared to the respective corresponding prior year periods. The increase in sales in both the third quarter and first nine months of 2017 when compared to the respective corresponding prior year periods primarily reflected sales from the Velvac acquisition. ~~Excluding Velvac's sales in the third~~ quarter of ~~2017, sales in the Industrial Hardware segment would have increased 12% when compared to the third quarter of 2016 and sales in the first nine months of 2017 would have increased by 13% when~~2020 compared to the first ~~nine months~~quarter of ~~2016.~~ 2019. Sales increased due to the inclusion of Big 3 Precision in the 2020 period. Excluding Big 3 Precision, sales would have decreased 11%. Increased sales in the specialty vehicle, military, and off-highway markets were not sufficient to offset sales reduction in the distribution, Class 8 truck, recreational vehicle, and aftermarket truck parts markets in the second half of March when certain of our customers closed operations due to actions taken to help stop the spread of COVID-19. Excluding Big 3 Precision, net sales decreased 13%, which was offset by price increases and sales of new products ~~included tumbler paddles,~~contributing 2% in the 2020 period. New products include a handle and finger pull assembly, emergency door latch ~~brackets~~ and ~~panels for the class 8 trucking industry.~~a mount plate latch.

Cost of products sold ~~for the Industrial Hardware segment~~ increased ~~$15.5 million or 140% in the third quarter of 2017 and $30.3 million or 89%~~23% in the first ~~nine months~~quarter of ~~2017~~2020 as compared to the ~~respective corresponding periods in 2016. The increase in the~~first quarter of 2019. Excluding Big 3 Precision, cost of products sold in both the third quarter and first nine months of 2017 when compared to the respective corresponding prior year periods primarily reflects cost of products sold attributable to the Velvac acquisition.

~~The most significant factors resulting in changes in cost of products sold in the third quarter of 2017 compared to the third quarter 2016 included:~~

·	~~an increase of $10.5 million or 163% in raw material costs, with Velvac representing $9.6 million of such increase;~~

·	~~an increase of $2.3 million or 73% in costs for payroll and payroll related charges, with Velvac representing $1.9 million of such increase;~~

·	~~an increase of $0.8 million or 368% in freight and other shipping costs;~~

·	~~an increase of $0.6 million in miscellaneous costs;~~

·	~~an increase of $0.3 million or 100% in depreciation expense;~~

·	~~an increase of $0.3 million in scrap costs;~~

·	~~an increase of $0.2 million or 85% in supplies and tools expense; and~~

·	~~an increase of $0.2 million or 189% in rent expense.~~

~~The most significant factors resulting in changes in cost of products sold in the first nine months of 2017~~would have decreased by 11% compared to the first ~~nine months~~quarter of ~~2016 included:~~

·	~~an increase of $22.3 million or 114% in raw materials costs, with Velvac representing $18.1 million such increase;~~

·	~~an increase of $2.6 million or 28% in payroll and payroll related charges, with Velvac representing the entire increase;~~

·	~~an increase of $2.1 million in miscellaneous expenses, with Velvac representing the entire increase;~~

·	~~an increase of $1.7 million in freight and other shipping costs, Velvac represents the entire increase;~~

·	~~an increase of $0.3 million or 125% in scrap costs;~~

·	~~an increase of $0.3 million in foreign currency exchange expense;~~

·	~~an increase of $0.2 million or 35% in supplies and tools expense;~~

·	~~an increase of $0.2 million or 39% in utilities costs~~

·	~~an increase of $0.2 million or 62% in rents expense; and~~

·	~~an increase of $0.2 million or 26% in depreciation expense.~~

2019. Material costs decreased $3.4 million due to lower sales volume and lower material costs incurred in producing a new Class 8 truck mirror that was awarded in 2018. Many of the components sourced during the first quarter of 2019 were at higher than normal material costs. As of the first quarter of 2020, all components have been sourced to more favorable suppliers and costs have normalized. Also impacting the first quarter were more favorable freight costs, which were down $0.6 million in the first quarter of 2020 compared to the first quarter of 2019 due to non-recurring expedited shipping costs. Payroll and payroll-related costs decreased $0.3 million offset by $0.3 million due to the under absorption of operating costs. Finally, we experienced tariff costs on China-sourced products of approximately $0.8 million compared to $0.2 million in the first quarter of 2019.

Gross margin for the Industrial Hardware segment decreased in the third quarter of 2017 to 19% from 27% in the comparable prior year period and decreased in the first nine months of 2017 to 23% from 25% in the first nine months of 2016. ~~Gross margin~~ as a percentage of net sales in the first quarter of 2020 was ~~adversely effected by~~ ~~a $1.2 million charge~~comparable to ~~cost~~the first quarter of ~~goods sold related to purchase accounting for the Velvac acquisition.~~2019 of 23%.

~~Engineering expenses~~Product development expense ~~as a percentage of sales for the Industrial Hardware segment increased~~decreased by $1.5 million in the ~~third~~first quarter ~~of 2017~~2020 compared to ~~4% from 1%~~the first quarter in 2019 due primarily to the ~~three month period of 2016 and increased to 3% in the nine month period of 2017 from 1% in the nine months of 2016. This increase was primarily the result~~closure of the Velvac ~~acquisition.~~Road-iQ development operation in Bellingham, Washington in the second quarter of 2019, as we adopted a leaner approach to the development of new vision products.

We incurred no 22restructuring costs

during the first quarter of 2020 compared to restructuring costs of $0.8 million during the first quarter of 2019, which were related to the consolidation of our Salisbury, North Carolina composite panel business into our Canadian composite panel business in Kelowna, British Columbia. Costs incurred related to the write off of inventory and fixed assets, moving, severance and the termination of a lease.

Selling and administrative ~~expenses~~expense ~~in the Industrial Hardware segment~~ increased ~~$0.8 million or 33% in the third quarter of 2017 and $6.0 million or 81%~~38% in the first ~~nine months~~quarter of ~~2017 as~~2020 compared to the ~~respective corresponding periods~~first quarter of ~~2016. The increase in~~2019 due primarily to the inclusion of Big 3 Precision. Excluding Big 3 Precision, selling and administrative expenses ~~in both the third quarter and nine months of 2017 when compared to the respective corresponding prior year periods primarily reflects costs from the Velvac acquisition.~~

~~The most significant factors resulting in changes in selling and administrative costs in the third quarter of 2017 compared to the third quarter of 2016 included:~~

·	~~an increase of $0.4 million or 24% for payroll and payroll related charges, with Velvac representing the entire increase;~~

·	~~an increase of $0.2 million or 291% in travel expenses; and~~

·	~~an increase of $0.2 million or 606% in amortization of patent costs.~~

~~The most significant factors resulting in changes in selling and administrative costs in the first nine months of 2017~~decreased 2% compared to the first ~~nine months~~quarter of ~~2016 included:~~

·	~~an increase of $4.0 million or 71% for payroll and payroll related charges, with Velvac representing $3.4 million of such increase;~~

·	~~an increase of $0.8 million for commissions and royalty costs;~~

·	~~an increase of $0.7 million or 79% for other administrative expenses, which includes Velvac; and~~

·	~~an increase of $0.5 million in depreciation and amortization charges.~~

2019. Payroll and payroll-related expenses decreased by $0.3 million, or 8%, compared to the first quarter of 2019.

Security Products Segment

Net sales in the Security Products segment ~~increased 18% in the third quarter of 2017 and increased 6%~~decreased 16% in the first ~~nine months~~quarter of ~~2017~~2020 compared to the ~~respective corresponding periods~~first quarter of ~~2016. The increase~~2019. Sales growth attributable to Load N Lock, which we acquired in June of 2018, partially offset the impact of lower demand across the majority of the markets we serve including distribution, industrial, vehicular accessories and commercial laundry, as well as a loss of supply contracts for mechatronic padlock systems and recreational vehicles door latches, which generated sales in the ~~third~~first quarter of ~~2017 was primarily the result~~2019, that did not recur in 2020. Net sales of ~~the introduction~~existing products decreased 17%, while price increases and sales of new products contributed 1% in the ~~vehicle~~2020 period. New product sales included a top mount power lock ~~markets. Sales of new products included locking kits for the motorcycle market~~module and ~~connecting rods for the vehicle market.~~a crossbar lock assembly.

Cost of products sold ~~for the Security Products segment increased $2.4 million or 27% in the third quarter of 2017 and increased $2.0 million or 7%~~decreased 18% in the first ~~nine months of 2017 compared to the respective corresponding periods of 2016.~~

~~The most significant factors resulting in changes in cost of products sold in the third~~ quarter of ~~2017 compared to the third quarter of 2016 included:~~

·	~~an increase of $1.7 million or 30% in raw material costs;~~

·	~~an increase of $0.4 million or 17% in costs for payroll and payroll related charges;~~

·	~~an increase of $0.1 million in foreign currency costs; and~~

·	~~an increase of $0.1 million or 45% in supplies and tools expenses.~~

~~The most significant factors resulting in changes in cost of products sold in the first nine months of 2017~~2020 compared to the first ~~nine months~~quarter of ~~2016 included:~~

·	~~an increase of $1.4 million or 7% in raw materials;~~

·	~~an increase of $0.3 million in foreign exchange charges;~~

·	~~an increase of $0.1 million or 8% in other shipping costs; and~~

·	~~an increase of $0.1 million or 8% in supplies and tools expense.~~

2019, primarily as a result of lower sales volume, reduced payroll and payroll-related costs of $0.2 million, or 8%, and the mix of products sold.

Gross margin ~~for the Security Products segment in the third quarter~~as a percentage of ~~2017 decreased to 30% from 34% in the third quarter of 2016 and decreased to 30% in 2017 from~~net sales was 31% in the first ~~nine months~~quarter of ~~2017 and~~2020 compared to 29% in the ~~comparable prior year period~~first quarter of ~~2016.~~

2019.

2322

~~Engineering expenses~~Product development expense as a percentage of net sales ~~for the Security Products segment decreased~~was 6% in the ~~third~~first quarter ~~of 2017~~2020 compared to ~~3% from~~ 4% in the ~~three month period~~first quarter of ~~2016 and decreased to 3%~~2019. This increase reflects a continuation in the ~~first nine month period~~development of ~~2017 from 4% in the nine months of 2016.~~a Bluetooth locking system and a new cable lock system.

Selling and administrative expenses~~in the Security Products segment increased $0.1 million or 4% in the third quarter of 2017 and $1.0 million or 13%~~ decreased 11% in the first nine months of 2017 as compared to the respective corresponding periods of 2016. This was due to third quarter costs related to personnel changes and investment in sales and marketing resources in order to support the strategic growth plan for this segment.

~~The most significant factors resulting in changes in selling and administrative costs in the third~~ quarter of ~~2017 compared to the third quarter of 2016 included:~~

·	~~an increase of $0.1 million or 7% for payroll and payroll related charges.~~

~~The most significant factors resulting in changes in selling and administrative costs in the first nine months of 2017~~2020, compared to the first ~~nine months~~quarter of ~~2016 included:~~

·	~~an increase of $0.6 million or 12% for payroll and payroll related charges; and~~

·	~~an increase of $0.3 million or 33% in other administrative expenses.~~

2019. The most significant driver in this reduction was due to decreased payroll and payroll related costs offset by an increase in our bad debt reserve in the amount of $152,000 related to a customer that filed for chapter 11 bankruptcy during the first quarter of 2020.

Metal Products Segment

Net sales in the Metal Products segment ~~increased 50% in the third quarter of 2017 and 45%~~decreased 27% to $5.7 million in the first ~~nine months~~quarter of ~~2017 as~~2020 compared to the ~~respective corresponding prior year periods.~~first quarter of 2019. Sales of our mining products decreased by 21%, while sales of industrial casting products decreased by 35%. Mining sales ~~increased 34% and 39%, respectively, for the third quarter and first nine months of 2017 as compared to the comparable periods of 2016. The rebound~~ in the ~~mining industry is the result~~first quarter of ~~the easing~~2020 were impacted by a combination of ~~environmental regulations and increases in~~growing renewable energy capacity, extremely low natural gas prices and unusually warm weather in the first quarter, which ~~created an increase in demand for our mine related products. The sale~~led utilities to cut back on coal usage. Sales of industrial castings in the first quarter were negatively impacted by the loss of a customer who temporarily sourced products ~~increased substantially as compared~~from us due to a fire at its facility in 2018, which temporarily shut down production of product that would otherwise have been sourced internally. In addition, sales were negatively impacted due to the ~~prior year and was up 130% and 92%, respectively, for~~completion of contracts from a customer serving the ~~three and nine months September 30, 2017. Sales of new products included numerous types of pipe and gas fittings for the oil, water and gas industries.~~transit industry.

Cost of products sold ~~for the Metal Products segment increased $2.1 million or 50% in the third quarter of 2017 and $3.6 million or 27%~~decreased 22% in the first nine months of 2017 compared to the respective corresponding periods of 2016. Most of the cost increase in the third quarter relates to increased sales volume, however an increase of 33% in raw material cost had a disproportionate effect on the third quarter 2017 as compared to the third quarter of ~~2016.~~

~~The most significant factors resulting in changes in cost of products sold in the third quarter of 2017 compared to the third quarter of 2016 included:~~

·	~~an increase of $0.8 million or 60% in raw materials;~~

·	~~an increase of $0.5 million or 132% in costs for supplies and tools;~~

·	~~an increase of $0.3 million or 21% in payroll and payroll related charges;~~

·	~~an increase of $0.2 million or 85% in utilities costs; and~~

·	~~an increase of $0.3 million or 287% in maintenance and repair costs.~~

~~The most significant factors resulting in changes in cost of products sold in the first nine months of 2017~~2020, compared to the first ~~nine months~~quarter of ~~2016 included:~~

·	~~an increase of $1.2 million or 24% in payroll and payroll related charges;~~

·	~~an increase of $1.1 million or 28% in raw materials;~~

·	~~an increase of $1.1 million or 85% in costs for supplies and tools;~~

·	~~an increase of $0.3 million or 35% in utilities costs;~~

·	~~an increase of $0.3 million or 42% in maintenance and repair costs;~~

·	~~a decrease of $0.2 million or 100% in outside finishing costs; and~~

·	~~a decrease of $0.1 million or 12% in depreciation expense.~~

2019, as a result of lower sales volume.

Gross margin ~~for the Metal Products segment~~as a percentage of net sales was ~~flat at 11% in the third quarters of 2017 and of 2016~~ ~~and was 15%~~2% in the first ~~nine months~~quarter of ~~2017 and 3%~~2020 compared to 9% in the ~~comparable prior year period. The increases in the gross margin for the~~ first ~~nine months~~quarter of ~~2017 was primarily due to the higher sales volume which caused improved utilization of the Company's production capacity in 2017 as compared to the corresponding 2016 periods.~~2019.

Selling and administrative expenses~~in the Metal Products segment increased $0.2 million or 42% in the third quarter of 2017 and $0.6 million or 43%~~ decreased 6% in the first ~~nine months~~quarter of ~~2017 as~~2020 compared to the ~~respective corresponding periods~~first quarter of ~~2016.~~

2019. The most significant ~~factor resulting in changes in selling~~drivers of this reduction were payroll and administrative costs in the third quarter and first nine months of 2017 compared to the third quarter and first nine months of 2016 was a $0.4 million charge to remediate and monitor a landfill environmental issue that was expensed in the second and third quarters of 2017.payroll-related costs.

~~Other Items~~Impact of Inflation

~~Interest expense~~ ~~increased $0.3 million in~~As of the ~~third~~end of the first quarter of ~~2017 and $0.6 million in~~2020, we do not believe that inflation has had a material impact on the ~~first nine months of 2017 compared to the respective corresponding prior year period due to the increased level of debt incurred in the Velvac acquisition.~~

~~Other income~~ ~~was not material to the financial statements~~Company’s business, revenues or operating results during the periods ~~covered by this Quarterly Report on Form 10-Q.~~

~~Income taxes~~ reflected the change in operating results. The effective tax rates in the third quarter and first nine months of 2017 were 32% and 32%, respectively, compared to 26% and 30%, respectively in the corresponding periods of 2016. The higher than expected effective rate for the first nine months of 2017 was the result of higher earnings estimates from our United States sources compared to earnings estimates from foreign sources that have lower overall tax rates.presented.

Liquidity and Sources of Capital

The Company generated ~~$10.2~~approximately $1.5 million of cash from ~~its~~ operations during the first ~~nine months~~quarter of ~~2017~~2020 compared to ~~$9.0~~approximately $1.5 million during the ~~same period in 2016.~~first quarter of 2019. The ~~increase in~~ cash flows in the ~~2017~~first quarter of 2020 period ~~compared~~were comparable to the ~~prior year period was primarily the result~~first quarter of increased sales and profitability during the 2017 period, including as a result of the Velvac acquisition, and the associated timing differences in the collection of accounts receivable, payments of liabilities, and changes in inventories.2019 period. Cash flow from operations coupled with cash at the ~~new loan were~~beginning of the 2020 fiscal year was sufficient to ~~acquire Velvac and~~ fund capital expenditures, debt service, and dividend payments.

The Company holds marketable securities totaling approximately $367,000. The Company did not purchase any marketable securities during the three month period ended September 30, 2017 Marketable securities are acquired for investment purposes. Additions to property, plant and equipment were ~~$1.5~~approximately $0.8 million for the first ~~nine months~~quarter of ~~2017~~2020 and ~~$1.8~~$0.7 million for the ~~same period in 2016. Total capital expenditures for all~~first quarter of ~~2017 are expected to be approximately $3.0 million.~~2019. As of ~~September 30, 2017,~~March 28, 2020, there was approximately ~~$200,000~~$0.1 million of outstanding commitments for ~~these~~ capital expenditures.

The following table shows key financial ratios ~~as of~~at the end of each specified period:

	Third Quarter 2017			Third Quarter 2016			Year End 2016			First Quarter 2020			First Quarter 2019			Year End 2019
Current ratio		3.1			5.7			6.0			3.4			3.6			3.6
Average days' sales in accounts receivable		53			53			49
Average days’ sales in accounts receivable											57			49			51
Inventory turnover		3.5			3.1			3.0			3.6			3.7			4.2
Total debt to shareholders' equity		40.6	%		2.6	%		2.2	%
Total debt to shareholders’ equity											92.8	%		28.8	%		93.7	%

~~Total debt to shareholders' equity increased due to the Company leveraging the purchase of Velvac with a $31 million loan and a drawdown of $5 million on the revolving portion of its line of credit.~~

The following table shows important liquidity measures as of the balance sheet date for each specified period ~~below~~ (in millions):

										First			First			Year
										Quarter			Quarter			End
	Third Quarter 2017			Third Quarter 2016			Year End 2016			2020			2019			2019
Cash and cash equivalents
- Held in the United States	$	7.1		$	9.7		$	11.2		$	9.6		$	4.1		$	9.0
- Held by a foreign subsidiary		14.1			11.9			11.5			6.9			9.5			9.0
		21.2			21.6			22.7			16.5			13.6			18.0

Working capital		68.0			64.1			64.8			81.8			72.8			83.0
Net cash provided by operating activities		10.2			9.0			12.4			1.5			1.5			23.0
Change in working capital impact on net cash used in operating activities		1.4			(0.1	)		(0.5	)
Net cash used in investing activities		(43.9	)		(1.8	)		(2.9	)
Net cash used in financing activities		31.8			(3.1	)		(4.2	)
Change in working capital impact on net cash (used) in operating activities											(2.7	)		(2.5	)		(0.3	)
Net cash (used) in investing activities											(0.4	)		(0.9	)		(85.8	)
Net cash (used) in financing activities											(2.3	)		(1.1	)		(67.0	)

The cash used in investing activities was primarily for the acquisition of Velvac. The cash from financing activities was the result of the execution of the loan with People's and the revolving line of credit facility with People's to provide a significant share of the capital used in the acquisition of Velvac.

~~Federal income taxes have not been provided for on~~Inventories of $55.3 million represent an increase of 1% at March 28, 2020 as compared to $54.6 million at the ~~undistributed earnings~~end of fiscal year 2019. Inventories increased 7% in the first quarter of 2020, as compared to $51.6 at the end of the Company's foreign subsidiaries except where required under federal tax laws. The Company would be required to accrue and pay United States income taxes to repatriate the funds held by foreign subsidiaries not otherwise provided. The Company intends to reinvest these earnings outsidefirst fiscal quarter of ~~the United States indefinitely.~~

~~All cash held by foreign subsidiaries is readily convertible into other currencies, including the U.S. Dollar.~~

~~Total inventories increased approximately 33% to $45.2~~2019. Accounts receivable, less allowances were $39.9 million at March 28, 2020, as ~~of September 30, 2017~~ compared to ~~$34.0~~$37.9 million ~~as of year-end 2016~~at 2019 fiscal year end and ~~increased approximately 33% from $34.1~~$32.4 million at the end of the ~~third~~first fiscal quarter of 2016. The increase of inventory was primarily attributable to the acquisition of Velvac as management has made inventory control a priority since 2016. Accounts receivable were $28.3 million as of September 30, 2017 compared to $18.1 million at year end 2016 and $19.0 million as of the end of the third quarter of 2016.

On April 3, 2017, we incurred indebtedness under the Restated Loan Agreement in the aggregate principal amount of $31 million in the form of a term loan, the proceeds of which were used to repay the remaining outstanding ~~balances of the Original Term Loan and 2012 Term Loan (approximately~~ $1,429,000) and to acquire 100% of the common stock of Velvac (see Note A and F). On April 3, 2017, the Company also borrowed approximately $6.6 million on the revolving credit portion of the Restated Loan Agreement. The Company subsequently paid off $1.6 million on the revolving credit portion of the Restated Loan Agreement, which left an outstanding balance of $5 million on such revolving credit portion at September 30, 2017. See Note F for additional information regarding the terms of the Restated Loan Agreement, including repayment terms, interest rates and applicable loan covenants. Under the terms of the Restated Loan Agreement, the Company is subject to restrictive covenants that limit its ability to, among other things, incur additional indebtedness, pay dividends or make other distributions, and consolidate, merge, sell or otherwise dispose of assets, as well as financial covenants that require the Company to maintain a minimum debt service coverage ratio and a maximum total leverage ratio. These covenants may limit how we conduct our business, and in the event of certain defaults, our repayment obligations may be accelerated. We were in compliance with all of our covenants as of September 30, 2017.2019.

Cash, ~~on hand,~~ cash flow from operating activities and funds available under the revolving credit portion of the ~~Company's Restated Loan~~Credit Agreement are expected to be sufficient to cover future foreseeable working capital ~~requirements subject~~requirements. However, based on current macroeconomic conditions resulting from the uncertainty caused by COVID-19, the Company cannot provide any assurances of the availability of future financing or the terms on which it might be available. In addition, the interest rate on borrowings under the Credit Agreement varies based on our senior net leverage ratio, and the Credit Agreement requires us to maintain a senior net leverage ratio not to exceed 4.25 to 1 and a fixed charge coverage ratio to be not less than 1.25 to 1. A decrease in earnings due to responses to contain the spread of COVID-19 or resulting harm to the ~~risks~~financial condition of our customers or economic conditions generally, or an increase in indebtedness incurred to offset such a decrease in earnings, would have a negative impact on our senior net leverage ratio and ~~uncertainties outlined~~our fixed charge coverage ratio, which in turn would increase the ~~risk factors disclosed in~~cost of borrowing under the Credit Agreement and to cause us to fail to comply with the covenants under our ~~2016 Annual Report on Form 10-K as updated by, and incorporated by reference, in Item 1A of this Quarterly Report on Form 10-Q.~~Credit Agreement.

2624

Off-Balance Sheet Arrangements

As of the end of the fiscal quarter ended March 28, 2020, the Company does not have any material transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons, as described by Item 303(a)(4) of Regulation S-K, that have or are reasonably likely to have a material current or future impact on the Company’s financial condition, results of operations, liquidity, capital expenditures, capital resources or significant components of revenues or expenses.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

~~During~~As a result of the ~~third quarter~~Company’s status as a smaller reporting company pursuant to Rule 12b-2 of ~~2017, there were no material changes in market risk from what was reported in~~ the ~~Company's 2016 Annual Report on~~Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company is not required to provide the information under this Item 3, of Form ~~10-K.~~10-Q pursuant to Item 305 of Regulation S-K.

ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures:

As of ~~the end of the quarter ended September 30, 2017,~~March 28, 2020, the Company carried out an evaluation, under the supervision and with the participation of the ~~Company's~~Company’s management, including the Chief Executive Officer (the ~~"CEO"~~“CEO”) and the Chief Financial Officer (the ~~"CFO"~~“CFO”), of the effectiveness of the design and operation of the ~~Company's~~Company’s disclosure controls and procedures pursuant to Exchange Act Rule 240.13a-15. As defined in Exchange Act Rules 240.13a-15(e) and 240.15d-15(e), ~~"the~~“the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.~~" Based upon that evaluation, the CEO and CFO concluded that the Company's current disclosure controls and procedures were effective as of the September 30, 2017 evaluation date.~~”

The Company believes that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. The ~~Company's~~Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the CEO and CFO have concluded that these controls and procedures are effective at the ~~"reasonable assurance" level.~~“reasonable assurance” level as of March 28, 2020.

Changes in Internal ~~Controls~~Control Over Financial ~~Reporting:~~Reporting:

During the ~~third quarter of 2017,~~period covered by this Quarterly Report on Form 10-Q, there ~~were~~have been no ~~significant~~ changes in the Company's internal control over financial reporting that have materially affected or are reasonably likely to materially affect, the ~~Company's~~Company’s internal control over financial reporting.

2725

PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

~~During 2010,~~The Company is a party to various legal proceedings from time to time related to its normal business operations. As of the end of the quarter ended March 28, 2020, the Company was contacted by the State of Illinois regarding potential ground contamination at its plant in Wheeling, Illinois. The Company entered into a voluntary remediation program in Illinois and has engaged an environmental clean-up company to perform testing and develop a remediation plan. Since 2010, the environmental company has completed a number of tests and the design of a final remediation system is currently being reviewed and is expected to be approved in the fourth quarter of 2017. The total estimated cost for the proposed remediation system is anticipated to be approximately $55,000.does not have any material pending legal proceedings.

~~During~~In 2016, the Company created a plan to remediate a landfill of spent foundry sand maintained at the ~~Company's Metal Casting~~Company’s metal casting facility in ~~Syracuse,~~ New York. This plan was ~~presented~~agreed to by the New York Department of Environmental Conservation (the ~~"DEC"~~“DEC”) ~~for approval in 2017. The Company is in final negotiations with the DEC, and based~~on March 27, 2018. Based on estimates provided by the ~~Company's~~Company’s environmental engineers, the anticipated cost to remediate and monitor the landfill was ~~$380,000 which~~$430,000. The Company accrued for and expensed the ~~Company expensed~~entire $430,000 in the ~~second~~first quarter of 2018 and ~~third quarters~~fiscal 2017. In the fall of ~~2017.~~

~~There are no other legal proceedings, other than ordinary routine litigation incidental to~~2018, detailed construction drawings were prepared by an outside consultant in conjunction with informal progress reviews by the ~~Company's business, to which either~~New York State Department of Environmental Conservation (the “NYSDEC”). Long-term groundwater monitoring commenced in April of 2019. Verbal approval for the ~~Company or any~~closure plan was received from the NYSDEC in May of ~~its subsidiaries~~2019. Written approval is ~~a party or~~anticipated in the first quarter of ~~which any of property~~2020. Construction of the ~~Company or any subsidiary~~closure remedies, including improved drainage system, regrading, and installation of a low permeability cap, is anticipated in the ~~subject.~~spring of 2020. In the summer of 2020, following the completion of construction work, a closure report and maintenance plan is expected to be prepared for the NYSDEC. This closure report and maintenance plan will document the work done and request acknowledgment of satisfactory completion of the Order on Consent between Frazer and Jones, and the NYSDEC.

ITEM 1A – RISK FACTORS

The ~~Company's~~Company’s business is subject to a number of risks, some of which are beyond its control. In addition to the other information set forth in this ~~report,~~Quarterly Report on Form 10-Q, the ~~Company's stockholders~~Company’s shareholders should carefully consider the factors discussed in Item 1A. ~~- "Risk Factors"~~“Risk Factors” of the ~~Company's 2016 Annual Report on~~Company’s 2019 Form ~~10-K, as filed with the SEC on March 15, 2017, that~~10-K. These risk factors could have a material adverse effect on the ~~Company's~~Company’s business, results of operations, financial condition and/or liquidity and ~~that~~ could cause ~~its~~our operating results to vary significantly from period to period. AsIn light of ~~September 30, 2017, there have been no material changes~~recent developments relating to the COVID-19 pandemic, the Company is supplementing the risk factors previously disclosed in Part I, Item 1A, “Risk Factors” in our 2019 Form 10-K to include the ~~Company's most recent Annual Report~~following risk factor:

The Company’s business has been and is expected to continue to be negatively impacted by the ongoing coronavirus (COVID-19) pandemic.

As a result of the COVID-19 pandemic, the Company has experienced and can be expected to continue to experience disruptions to its business, its operations, the delivery of its products and customer demand for its products, including the following:

The Company has operations in Shanghai and Dongguan, China that have been adversely affected by the impact of COVID-19. The virus interfered with the ability of Company employees and suppliers to conduct business. We source approximately 15% of our products and components from China. As a result of government mandated shutdowns at the Company’s and its suppliers’ factories in China, many of the products ordered have been delayed by approximately 4 to 6 weeks, which has resulted and will continue to result in corresponding delays in delivery of the Company’s products to its customers. These delays have had and are likely to continue to have an adverse impact on our business, operations, fulfillment of production requirements and operating results,

On March 11, 2020, the World Health Organization declared the rapidly spreading COVID-19 outbreak to be a global pandemic, and shortly thereafter government authorities in the United States began closing non-essential business. The majority of the Company’s businesses are considered essential and have remained open but are operating at reduced levels. This reduction in operations has exacerbated delays in delivery of customer orders and, to the extent we continue to operate at reduced levels, is likely to cause further delays. Any sustained reduction in operations could impair the Company’s ability to meet production requirements in a timely manner or at all. These effects have had and are likely to continue to have an adverse impact on the Company’s business, financial condition and operating results.

Many of the Company’s customers in both automotive and non-automotive industries experienced varying degrees of shutdowns beginning in the last week of March 2020, with some of these customers tentatively expected to begin reopening as soon as May 4, 2020. These temporary shutdowns have had and, for so long as they remain in place, are likely to continue to have, an adverse impact on demand for our products. A sustained decrease in demand would negatively impact our business, financial condition and operating results. In addition, the COVID-19 pandemic has had and may continue to have an adverse impact on the operations, financial results and finances of many of our customers, which has impacted and could continue to impact customer payment cycles and payments due from customers.

The broader economic impact of the COVID-19 may result in unfavorable operating earnings and cash flow generation in the months to follow. Current global economic conditions are highly volatile due to the COVID-19 pandemic, resulting in economic slowdowns that [have caused and] [may]/[are likely to] [continue to] cause contractions in some or all of the markets we serve, which [has led to]/[may lead to]/[is likely to lead to] decreased demand for the Company’s products, which in turn is expected to negatively impact the Company’s financial condition and operating results. Other macroeconomic factors also remain dynamic, and any causes of market size contraction, including economic uncertainty related to the United Kingdom's exit from the European Union, and overall economic slowdowns, could reduce the Company’s sales or erode operating margin, in either case reducing earnings. In addition, volatile global economic conditions may cause foreign exchange rate fluctuations, which could result in increases or decreases in earnings and may adversely affect the value of the Company’s assets outside the United States. Increased pricing in response to fluctuations in foreign currency exchange rates may offset portions of the currency impacts but could also have a negative impact on demand for the Company’s products, which would affect sales and profits. Exchange rate fluctuations could also increase pricing pressure and impair the ability of the Company’s products to compete with products imported from regions with favorable exchange rates.

Shutdowns or other restrictions imposed to slow the spread of COVID-19 have impacted and may continue to impact the prices and availability of certain of the raw materials used in the production of the Company’s products, which could impair the Company’s ability to procure the required raw materials for its operations or increase the cost of manufacturing its products. If the price of raw materials increases, the Company may be unable to pass these increases on to its customers and could experience reductions to its profit margins. Also, any decrease in the availability of raw materials could impair the Company’s ability to meet production requirements in a timely manner or at all.

The Company’s management has been focused on mitigating the impact of the COVID-19 pandemic on our employees and operations, which has required and will continue to require a substantial investment of time and resources. This has resulted and can be expected to continue to result in a diversion of management attention and resources away from strategic, initiatives, new business opportunities, potential acquisitions, and the overall profitability of our business, and the Company cannot predict how long this may continue.

The economic downturn could also result in the carrying value of goodwill or other intangible assets exceeding their fair value, which could require the Company to recognize asset impairment.

To the extent the Company draws under the revolving portion of the Credit Agreement, debt of the Company would increase. Such an increase in indebtedness could adversely affect the Company’s financial results or ability to incur additional debt and could negatively impact credit ratings. The continuing impact of the COVID-19 pandemic could also negatively impact the Company’s compliance with the financial covenants under the Credit Agreement or the interest rate of borrowings under the Credit Agreement. In addition, as a result of the risks described above, the Company may in the future be required to raise additional debt or equity financing, and the availability, terms and cost of such financing would depend on, among other things, global economic conditions, conditions in the global financing markets, trading prices of the Company’s common stock, the credit ratings of the Company, and the outlook for the industries in which the Company operates, all of which could be negatively impacted by the COVID-19 pandemic. There can be no assurance that such financing would be available on acceptable terms, in sufficient quantities, or at all.

The COVID-19 pandemic continues to evolve rapidly, and additional material impacts and disruptions are likely to occur. The factors described above, which may worsen, and other factors that the Company cannot predict, can be expected to have a material adverse impact on the business, operations, financial results and capital resources of the

Company. The ultimate impact of the COVID-19 pandemic on the Company is highly uncertain and subject to change and will depend on future developments, which cannot be accurately predicted, including the duration of the pandemic, additional or modified government actions, new information that may emerge concerning the severity and impact of the COVID-19 and the actions taken to contain COVID-19 or address its impact in the short and long term, among others. We do not yet know and cannot predict the full extent of potential impacts on the business, operations, financial results and capital resources of the Company.

In addition, any of the risks and uncertainties set forth in Part I, Item 1A of the 2019 Form ~~10-K.~~ 10-K can be expected to be further heightened by the COVID-19 pandemic and have a material adverse effect on the Company’s business, prospects, financial condition, results of operations and capital resources.

The Company may also disclose changes to ~~such~~risk factors or disclose additional risk factors from time to time in its future filings with the SEC. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may materially adversely affect its business, financial condition, or operating results.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~There have been no sales of unregistered securities by the Company or purchases of registered equity securities by the Company during the period covered by this Quarterly Report on Form 10-Q.~~

None

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4 – MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 – OTHER INFORMATION

None

ITEM 6 – EXHIBITS

3.1) Restated Certificate of Incorporation of the Company, as amended (conformed copy).*

3.2) Amended and Restated By-Laws of the Company, as amended through April 27, 2016 (conformed copy).*

4) Description of Securities.*

31) Certifications required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32) Certifications pursuant to Rule 13a-14(b) and 18 USC 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101) The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 28, 2020, formatted in XBRL (eXtensible Business Reporting Language); (i) Condensed Consolidated Statements of Operations (Unaudited) for the three months ended March 28, 2020 and March 30, 2019 (2) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended March 28, 2020, and March 30, 2019; (ii) Condensed Consolidated Balance Sheet (Unaudited) as of March 28, 2020 and December 28, 2019; (iii) Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 28, 2020 and March 30, 2019; and (iv) Notes to the Condensed Consolidated Financial Statements (Unaudited)**.

* Filed herewith.

**Furnished herewith

2928

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	THE EASTERN COMPANY
	(Registrant)
DATE: ~~November~~May 6, ~~2017~~2020	/s/~~A ugust~~August M. Vlak
	August M. Vlak President and Chief Executive Officer

DATE: ~~November~~May 6, ~~2017~~2020	/s/John L. Sullivan III
	John L. Sullivan III Vice President and Chief Financial Officer

~~DATE: November 6, 2017~~	~~/s/Angelo M. Labbadia~~
	~~Angelo M. Labbadia~~
	~~Chief Operating Officer~~

3029

LIABILITIES AND SHAREHOLDERS' EQUITY	September 30, 2017			December 31, 2016
Current Liabilities
Accounts payable	$	15,327,476		$	7,048,174
Accrued compensation		3,273,317			3,112,404
Other accrued expenses		6,360,362			1,812,647
Current portion of long-term debt		6,550,000			892,857
Total Current Liabilities		31,511,155			12,866,082

Other long-term liabilities		288,805			288,805
Long-term debt, less current portion		29,062,500			892,857
Accrued postretirement benefits		1,018,815			1,051,700
Accrued pension cost		25,780,522			26,631,438



Shareholders' Equity
Voting Preferred Stock, no par value:
Authorized and unissued: 1,000,000 shares
Nonvoting Preferred Stock, no par value:
Authorized and unissued: 1,000,000 shares
Common Stock, no par value:
Authorized: 50,000,000 shares
Issued: 8,956,144 shares in 2017 and 8,950,827 shares in 2016
Outstanding: 6,261,415 shares in 2017 and 6,256,098 shares in 2016		29,277,169			29,146,622
Treasury Stock: 2,694,729 shares in 2017 and 2016		(19,105,723	)		(19,105,723	)
Retained earnings		98,779,632			95,631,216

Accumulated other comprehensive income (loss):
Foreign currency translation		(902,749	)		(2,165,081	)
Unrealized loss on marketable securities and
derivative, net of tax		(9,479	)		--
Unrecognized net pension and postretirement benefit costs, net of tax		(20,419,472	)		(21,039,520	)
Accumulated other comprehensive loss		(21,331,700	)		(23,204,601	)
Total Shareholders' Equity		87,619,378			82,467,514
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	175,363,475		$	124,198,396

	Industrial Hardware Segment		Security Products Segment		Metal Products Segment		Total

Beginning balance	$	1,760,793	$	13,059,042	$	—	$	14,819,835
Investment – Velvac		17,502,024		—		—		17,502,024
Foreign exchange		73,881		—		—		73,881
Ending balance	$	19,336,698	$	13,059,042	$	—	$	32,395,740

2016 Gross Amount
Patents and developed technology	$	2,159,060	$	1,035,374	$	--	$	3,194,434	15.6
Customer relationships		--		449,706		--		449,706	5.0
Non-compete agreements		--		407,000		--		407,000	5.0
Intellectual property		--		307,370		--		307,370	5.0
Total Gross Intangibles	$	2,159,060	$	2,199,450	$	--	$	4,358,510	12.3

2016 Accumulated Amortization
Patents and developed technology	$	1,529,675	$	598,756	$	--	$	2,128,431
Customer relationships		--		179,882		--		179,882
Non-compete agreements		--		162,800		--		162,800
Intellectual property		--		122,948		--		122,948
Accumulated Amortization	$	1,529,675	$	1,064,386	$	--	$	2,594,061

Net December 31, 2016 per Balance Sheet	$	629,385	$	1,135,064	$	--	$	1,764,449

	Three Months Ended September 30, 2017					Year Ended December 31, 2016
	Shares		Weighted - Average Exercise Price			Shares		Weighted - Average Exercise Price
Outstanding at beginning of period		174,500		$	20.39		--		$	--
Issued		--			--		--			--
Outstanding at end of period		174,500			20.39		--			--

SARs and Options Outstanding and Exercisable
Range of Exercise Prices	Outstanding as of September 30, 2017	Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price	Exercisable as of September 30, 2017	Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price
$19.10-21.10	174,500	4.4	$20.39	--	--	--

	Fair Value	Level 1	Level 2	Level 3
Financial Liabilities Interest rate swap	$ 82,302	$ --	$ 82,302	$ --
Total liabilities	$ 82,302	$ --	$ 82,302	$ --

Consideration
Cash	$	4,078,000
Debt		36,000,000
Contingent consideration arrangement		2,070,000
	$	42,148,000
Recognized amounts of identifiable assets acquired and liabilities assumed
Accounts receivable	$	6,063,429
Inventory		12,992,377
Prepaid and other assets		494,617
Property plant and equipment		3,911,767
Other noncurrent assets		366,401
Other intangible assets		11,560,000
Current liabilities		(7,720,591	)
Deferred tax liabilities		(3,022,000	)
Total identifiable net assets		24,646,000
Goodwill		17,502,000
	$	42,148,000

	Nine Months Ended September 30, 2017
	Industrial			Security			Metal
	Hardware			Products			Products			Total
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of products sold		77.1	%		69.8	%		84.8	%		75.9	%
Gross margin		22.9	%		30.2	%		15.2	%		24.1	%

Engineering expense		3.3	%		3.0	%		--			2.8	%
Selling and administrative expense		16.2	%		17.9	%		9.7	%		15.8	%
Operating profit		3.4	%		9.3	%		5.5	%		5.5	%


	Nine Months Ended October 1, 2016
	Industrial			Security			Metal
	Hardware			Products			Products			Total
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of products sold		74.7	%		69.2	%		97.1	%		75.4	%
Gross margin		25.3	%		30.8	%		2.9	%		24.6	%

Engineering expense		0.8	%		3.7	%		--			1.9	%
Selling and administrative expense		16.3	%		16.8	%		9.8	%		15.6	%
Operating profit		8.2	%		10.3	%		-6.9	%		7.1	%